Investors Steer Toward the Cheapest ETFs as Industry Intensifies a Fee War | ETF Trends

Investors are now spoiled for choice when it comes to low-cost exchange traded funds as the ETF industry engages in an increasingly aggressive fee war that has driven costs closer and closer to zero.

U.S-listed ETFs that were once the cheapest around face even greater competition as more fund sponsors slash fees.

“The goalposts haven’t just shifted. They moved from one end of the field to the other,” Elisabeth Kashner, director of global fund analytics at FactSet, told the Financial Times.

The ongoing trend shows continued fee compression in the ETF industry and greater competition to cut costs or risk bleeding out assets to more aggressive rivals.

“In December 2017, the asset-weighted average expense ratio for ETFs that had gained market share from their direct competitors was 0.19 percent, while the losers cost 0.26 percent. By December 2021, 0.19 percent was the price tag on market share losers. Successful funds now cost 0.16 percent,” Kashner said.

“Investors have been flocking to lower-cost options across most segments of the ETF landscape. As a result, asset-weighted expense ratios have been falling across asset classes and strategies,” Kashner added. “Investor preference for the lowest-cost products has become entrenched.”

For example, Vanguard, a low-cost leader, has enjoyed greater popularity as many investors flocked to the fund sponsor’s cheap ETF offerings. Among the top ten most popular ETFs of 2022 by new inflows, Vanguard ETFs made up five.

Average fees worldwide are trending lower, with the U.S. leading the charge. According to FactSet data, the average asset-weighted fees for fixed income ETFs in the U.S. have declined to 13 basis points from 15 basis points since 2017

More thematic, niche, or alternative ETF strategies have also seen fees fall. Costs on alternative assets are down to 67 basis points from 89 basis points in the past year, and fees for geared or leveraged ETFs slipped to 71 basis points from 102 basis points.

“Asset-weighted expense ratios have been falling across asset classes and strategies. No matter the starting point, the destination is the same,” Kashner said. “There is no place to hide, no matter the asset class or strategy.”

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