ETFs are putting active fund managers on the ropes as increased competition and the ongoing fee war among ETF sponsors have increased the pressure on traditional fund managers.
Traditional stock-picking fund managers enjoyed a year of respite in 2017 as most on average were able to narrowly outperform benchmarks, which helped slow outflows from U.S. equity mutual funds from almost $250 billion in 2016 to $153 billion last year, reports Robin Wigglesworth for the Financial Times.
Nevertheless, the improvements in the actively managed mutual fund space did not impeded the momentum of index based ETFs last year. As ETF providers like Vanguard continue to slash prices in an attempt to capture greater market share, industry chief executives and analysts argue this will further squeeze the already-dropping costs commanded by active managers promising to beat the market.
“I thought we’d have seen even more fee reduction in 2017, but it’s becoming harder and harder to charge so much for active management,” Todd Rosenbluth, director of ETF and mutual fund research at CFRA, told the Financial Times.
According to Morningstar data, the average net expense ratio of a U.S. equity mutual fund dipped to 1.13% in 2017 from 1.44% in 2000, and asset management executives believe fees will only decline further this year. In contrast, U.S.-listed ETFs have an average expense ratio of 0.58%, according to XTF data.
“The ETF price war affects everyone else in the business as well,” the chief executive of one major US investment group, who declined to be named, told Financial Times.
If mutual fund players can’t beat ETFs, then many are opting to join them. More recently, established and new entrants to the ETF market, like Franklin Templeton, Deutsche Bank Asset Management, Charles Schwab, State Street and Vanguard, have all rolled out new cheaper ETFs or cut down costs on older products.
For example, Charles Schwab offers one of the cheapest ETFs on the market with a 0.03% expense ratio. Vanguard recently registered for a suite of factor-based ETFs, which may be a prelude to its intent on bringing the fee war to the smart beta ETF category.
The launch “was the latest salvo in these price wars, and another sign that the battle is not just being fought in the plain vanilla products”, Ben Johnson, head of ETF research at Morningstar, told FT.
For more information on ETFs, visit our ETF 101 category.