The ETF industry has been engaging in a prolonged fee war that has helped push annual costs on investing in ETFs closer and closer to zero.
In its latest salvo, BlackRock cut prices on 11 of its equity and bond ETFs with a total of $50 billion in assets under management last week, the Financial Times reports. Fees on four stock funds were modestly lowered while some fixed-income ETFs saw expense ratios cut by up to 70%.
VanEck also joined in on the action last week, lowering the cost of its $4.6 billion emerging market bond ETF, the largest local-currency denominated emerging market bond offering, by a third to 0.30%.
The cuts are becoming common occurrences in an increasingly intensified fee war between ETF providers, and providers are also seeing the benefits. Investor money has traditionally flowed to the largest funds as they have the most liquid shares, which in turn has helped operators gain economies of scale that they are able to pass on to customers.
Some ETFs Are Essentially Free
“It’s an ongoing price battle,” Todd Rosenbluth, director of ETF and mutual fund research at CFRA, told the Financial Times. “Some of these products are essentially free today.”
Furthermore, ETF investors have also exhibited an increasing willingness to funnel assets into the cheapest fund options. Over recent years, ETFs from providers like Vanguard and Charles Schwab have seen increasing inflows into some of their cheapest ETF options. State Street’s flagship S&P 500 ETF has also lost ground to Vanguard and BlackRock versions of the same fund.
Related: Rise of Fee-Based Advisors Supports ETF Growth Outlook
Due to the intensifying fee wars, the average asset-weight expense ratio of U.S. equity ETFs has slipped by 10 basis points over the past decade to a new low of 21 basis points at the end of 2017. On the other hand, despite similar fee cuts over the past decade, the average mutual fund still costs over twice that of ETFs, according to the Investment Company Institute.
JPMorgan’s analysts calculate that the funds in the lowest decile by expense ratio, or those with an expense ratio of 15 bps or below, have attracted three-quarters of all net U.S. ETF asset inflows over the past year.
“Cost is not the only thing that matters, but it is a dominant factor,” Shelly Antoniewicz, senior director of financial and industry analysis at the ICI, told the Financial Times. “Even within the index industry things are ultra-competitive now.”
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