ETF Providers Look for an Edge

NEW YORK (TheStreet) -- Over the past year, ETF providers and sponsors have taken increasingly bold steps in their attempts to make their products more attractive when compared to competitors. One of the more popular ways fund providers have attempted to achieve this goal has been to decrease the costs associated with holding the funds.

While cheap costs will certainly make using ETFs less of a financial burden on investors, the cheapest products are not always the best. Investors must be careful not to fall for marketing gimmicks that can result in the formation of a portfolio made of less than ideal holdings.

Early last week, Schwab (SCHB) announced that it was cutting the expense ratios on six of its eight products, thereby making their funds the cheapest within their respective niches.

This is actually the second cost-cutting measure to come from the firm. When Schwab, a relative newcomer to the ETF arena, first came onto the scene, it was forced to go toe-to-toe with established fund providers including State Street (STT) and iShares. In order to set itself apart from these competitors, Schwab announced that that it would wave commission fees on its new line of ETFs for clients with in-house accounts.

In response to Schwab's decision to slash commission fees, other firms have followed suit with their own expense-cutting measures.

In early February, Fidelity announced that it would cut commission fees on 25 iShares products. Not to be outdone, Vanguard responded in May by slashing its own commission fees for its entire line of 46 ETFs.

Aside from Schwab's move to reduce the expense ratios of a number of its funds, iShares also appears to be taking aim at share prices in hopes of gaining a leg up on competitors. In the past, iShares COMEX Gold Trust (IAU) has been a popular product, but has lagged in size behind the SPDR Gold Shares (GLD). In an effort to attract new assets, IAU went through a 10-for-1 share split at the close of trading yesterday, reducing the price of each individual share. Before, IAU, GLD and ETFS Gold Shares (SGOL) all had prices over $120 per share, but now IAU will trade for just over $12 per share. Although internally the fund remained unchanged, by making individual shares cheaper, IAU may appeal to investors looking to purchase gold in larger share blocks.