Lower fees relative to actively managed mutual funds have long been a catalyst for growth in the ETFs industry, but data suggest advisors and investors are increasingly prioritizing expense ratios in the ETF evaluation process.
“Nearly two-thirds (64%) of advisors and institutional investors ranked expense ratio as ‘very important’ when selecting ETFs, ahead of the nine other factors evaluated for importance. Expense ratio ranked number two among the most-important factors in the 2014-2016 surveys and No. 3 in 2013,” according to the fifth annual ETF industry survey by Brown Brothers Harriman and ETF.com.
As has been seen in prior years, ETF issuers have unveiled a spate of expense ratio reductions in 2017. Additionally, more fund providers are taking a closer look at their benchmark indices to try and reduce costs wherever they can, which ultimately will benefit the end ETF investor.
This year, investors are displaying an overt preference for low-cost ETFs as the bulk of ETF flows in 2017 this year have been directed to those funds with expense ratios of 0.2% per year or less. ETFs with annual fees of less than 0.1% have been particularly strong asset gatherers.
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Among this year’s top 10 asset-gathering ETFs, only the iShares MSCI EAFE ETF (NYSEArca: EFA), which tracks the developed EAFE or European, Australasia and Far East countries, has an expense ratio north of 0.2%. Just three others, including the iShares Core MSCI Emerging Markets ETF (NYSEArca: IEMG), have annual fees of over 0.1%.
“Expense ratio ranked as the top selection criteria for ETF investors for the first time in our survey’s 5-year history, this year coming in ahead of index methodology, historic performance, tax efficiency and other factors. Expense ratio also ranked above all other criteria in selecting actively-managed ETFs. This reflects a continuation of the trend toward low-cost investing that has been underway for some time, and it will be interesting to see how this evolves in 2018 and beyond,” said Shawn McNinch, Global Head of ETF Services at BBH.
At the end of November, year-to-date inflows for US-listed ETFs topped $423 billion, smashing previous annual records and underscoring the point that investors are increasingly flocking to lower-cost, index-based investment products.
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