“If you lower it, they will come.” -Bloomberg’s Eric Balchunas
“My sense is the majority of companies offering plain-vanilla ETFs simply don’t have much room to drop fees any further. Sure, some will still jockey for position by shaving a basis point here and there. Someone will offer a zero fee ETF (my $$$ is still on JPMorgan or Schwab). But when we’re at a point where investors are wondering why their fund is so cheap and what the catch is, we’re done here. There are only so many levers fund companies can pull.”
I should have known better. A quick timeline of events since I wrote that:
February 25th – Social Finance, Inc. (SoFi) files for the first “free” ETFs, the SoFi 500 ETF and SoFi Next 500 ETF, waiving their 19 basis point fees until at least March 2020.
Vanguard also announces they are branding a core lineup of ETFs – “Vanguard Select ETFs”- similar to “iShares Core ETFs” and “SPDR Portfolio ETFs”.
March 1st – We learn Vanguard chopped fees on three of the most popular ETFs on the planet: the Vanguard S&P 500 ETF (VOO), Vanguard Total Bond Market ETF (BND), and Vanguard Total Stock Market ETF (VTI). VOO and BND are now the lowest cost ETFs in their respective categories.
March 1st – StateStreet changes the index strategy and name on a junk bond ETF – the SPDR ICE BofAML Crossover Corporate Bond ETF (CJNK) – AND decreases the expense ratio by 25 basis points, undercutting their primary competition in the high yield bond ETF space.
March 5th – The Defiance 5G Next Gen Connectivity ETF (FIVG) launches with a fund fee of 0.30%, on the cheaper side for thematic ETFs. The lower price tag could help fend off competition from larger providers.
Totally, its like spraying BlackRock repellent on your fund
— Eric Balchunas (@EricBalchunas) March 5, 2019
March 7th – iShares launches two Japanese stock ETFs with fees of 0.15%, the iShares MSCI Japan Equal Weighted ETF (EWJE) and iShares MSCI Japan Value ETF (EWJV). The move is likely a response to recent competing low cost entries including the JPMorgan BetaBuilders Japan ETF (BBJP).
March 7th – DWS launches the Xtrackers MSCI USA ESG Leaders Equity ETF (USSG), undercutting the Vanguard ESG U.S. Stock ETF (ESGV) by 0.02% to become the cheapest U.S. equity ESG ETF. Incidentally, this was also the single biggest ETF launch of the past 15 years.
March 11th – JPMorgan announced they were launching the BetaBuilders U.S. Equity ETF (BBUS) with a fee of 0.02%, making it the cheapest ETF on the market. Some, including myself, had speculated this could be the first zero fee ETF.
March 11th – Charles Schwab, who had been eerily quiet during the past two weeks as competitors sliced fees, submitted an SEC filing indicating they were dropping fees on three popular ETFs.
This has all occurred in the span of TWO WEEKS!!! So, why did I prematurely declare the fee war over? My impression from visiting with numerous ETF issuers was they were completely fatigued on fee cuts and almost hoping competitors would play nice. Clearly, that’s not going to happen and we may be heading for a final, more painful bloodletting.
Couple of tweets today from Eric on fee cuts. This last leg of fee cuts in the ETF industry is going to be the most painful.
Companies going out of business, consolidation, layoffs, woof woof woof! https://t.co/p7fl4Rle2E
— Ryan Kirlin (@RyanPKirlin) March 1, 2019
Some question why ETF companies would fight over a mere basis point or two. The evidence is pretty clear. iShares undercut Vanguard by 1 basis point (0.03% vs 0.04%) on their S&P 500 ETF in 2016. That small fee cut resulted in iShares increasing their asset lead from $20 billion to $60 billion.
Source: Bloomberg TV
From the Wall Street Journal:
“72% of the assets in ETFs are held by funds with expense ratios below 0.20%, capturing 95% of net flows in 2018.”
Want more? ETFs charging 0.05% or less now make up nearly 20% of total ETF assets!
Source: Wall Street Journal
Right now, low fees make the ETF world go around. It’s a brutal existence for fund companies, but euphoria for investors. There is potential collateral damage in this war – namely transparency. Fund companies are for-profit businesses. They have to make money somewhere, whether that’s charging lower interest rates on cash held in investment accounts, hoping investors buy higher cost funds or services, or selling order flow. Investors should keep their radars up on ALL investment costs – explicit and implicit. But these ETF fee cuts are real, and they are spectacular.