There is currently something of a price war going on in the exchange traded funds market, as the big boys of ETFs jostle for market share. As with any price war of this nature, somewhere there is a point below which one of the protagonists cannot go, but for ETF investors around the world, it may be worth revisiting the fees and commissions you are currently paying.
ETFs are growing rapidly at the moment, particularly in the US, where more and more active investors are using them to take a view on markets. As passive instruments, they simply track a market index, thereby charging lower fees than active funds. They are used by both institutional and retail investors, and trade on stock exchanges like shares do. Consequently, investors don’t have to worry about the many fees – above and beyond the annual management fee – which cluster around active funds.
Three of the biggest providers on the block are BlackRock, State Street and Vanguard. These groups have become household names in US asset management and are currently in a fee-cutting war, reducing their Total Expense Ratios (a fancy name for trimming the fees charged by ETFs, above and beyond any management fee, which for ETFs is low to begin with).
The ETF industry has over $3 trillion invested in it already, and money continues to pour in as investors sell out of active funds or use ETFs to invest in foreign markets. For example, Vanguard has been reducing fees in its emerging markets ETFs, which, as The Armchair Trader noted last month, was a favourite sector for American investors in January.
Data that has been compiled by Bloomberg Intelligence shows that most of the $284 billion taken in by ETFs in the last year was going into funds with an average fee of 9 basis points or less. Taking Vanguard’s FTSE Emerging Markets ETF as just one example – Vanguard recently slashed the expense ratio on this to 14 basis points, which allows it to match the BlackRock iShares Core Emerging Markets MSCI Emerging Markets ETF.
Vanguard’s emerging markets ETF was the market leader in total assets, while BlackRock’s placed third. The move reflects one of the essential conundrums for ETF fund managers – how do you differentiate your product? ETFs use third party indexes to track: hence in this case Vanguard is using a FTSE index, so there is no hay to be made there in terms of intellectual capital by the fund manager – he cannot argue he is outperforming the competitor fund either. Performance in the ETF world is based on how closely and for how long the fund can track its index, not whether it can BEAT the index.
Trust and brand recognition? The likes of BlackRock and Vanguard are household names and both spend millions on advertising every year. Ultimately, the competition for your business boils down to a race to offer the cheapest possible product.
Even the brokers are at it now: E*Trade has added 47 ETFs from five providers to its commission free ETF platform since the beginning of the year. It is now offering 133 ETFs on a commission free basis.
“The shift towards passively managed index funds and ETFs has accelerated in recent years due to investors’ appetite for lower cost products, understanding that fees can impact their portfolio over time,” explains Rich Messina, SVP of investment product management at E*Trade Financial.
Among the new providers of commission-free ETFs at E*Trade since the beginning of the year are ETF Securities, Guggenheim Investments and IndexIQ.
It has never been cheaper, it seems, to be an investor in ETFs, and the range of available product just keeps getting bigger.