Investors Want the Lowdown on Low Costs for Smart Beta Funds

With the proliferation and growing adoption of smart beta funds, a common question investors ask is “How low can you go?” What that means, of course, is lower costs continue to serve as an important qualifier when selecting ETFs that fit an investor’s portfolio or more specifically, their budget.

“If there is one thing investors can control, it is cost,” wrote Ben Johnson in Morningstar. “As Jack Bogle reminded us time and again, in investing, you get what you don’t pay for.”

As more global investment firms roll out ETF products with low or even zero fees, it essentially creates a price war to capture investor capital. On the other end of the spectrum, funds are using higher fees paired with complex strategies to substantiate the increased cost.

In the end, however, investors still want the lowdown on low cost for funds—active, passive or a combination of both.

“Many asset managers have rolled out suites of strategic-beta ETPs to justify higher fees and to distract investors from this fundamental principle,” Johnson wrote. “In some cases, the fees charged by these funds have encroached on active management territory. Do not pay active management prices for passively managed funds.”

“Fortunately, the majority of these funds are reasonably priced, and a combination of competitive forces and economies of scale has pushed some of their fees down over time,” Johnson noted.

Johnson used fees charged by 197 strategic-beta products focused on strictly large-cap U.S. equities to create the histogram below. One thing worth noting is that nearly 73% of the products take an annual toll equal to or less than 0.40%–a sign of the times for lower costs.

“Forty basis points is 20 times the fee levied by the lowest-cost plain-vanilla U.S. equity ETF, JPMorgan BetaBuilders U.S. Equity ETF (BATS: BBUS), but materially lower than the 0.72% average fee of large-blend no-load mutual funds,” Johnson said. “Products falling into this range are generally sensibly priced. The remaining 27% charge fees in excess of 0.40%. These products merit an added degree of scrutiny. Any strategic-beta ETP that invests in U.S. stocks and takes a toll of 40 basis points or more should be viewed with suspicion.”

For investors interested in BBUS, it seeks investment results that closely correspond to the performance of the Morningstar® US Target Market Exposure Index. The index itself is a free float adjusted market capitalization weighted index which consists of equity securities primarily traded in the United States. The underlying index targets 85% of those stocks according to market capitalization, and primarily includes large- and mid-capitalization companies.

For more market trends, visit ETF Trends.