U.S. exchange-traded fund assets are rising fast, at $2.182 trillion, as of the first quarter of 2016, according to FactSet data. Total global ETF asset growth reached $3 trillion in the same time period. That growth is expected to escalate in the coming years. Additional data from PwC shows U.S.-based ETF asset growth "tripling" over the next five years, to about $6.2 trillion by 2021.
That means one thing: major money management firms are jockeying for a major slice of that pie, and are willing to cut fees to prove it.
Last week, Charles Schwab, the fifth-largest seller of ETFs in the U.S., said it was reducing costs on five of its ETFs by one cent for every $100 invested. Schwab may have felt compelled to cut fees, as chief competitor Blackrock just cut fees on 15 of its flagship iShares ETFs. Also, back in June, Fidelity Investments cut fees on 27 of its index funds and ETFs.
What's behind the battle over ETF fee cuts? It's all about competing better in the marketplace, Wall Street insiders say.
"There are two factors that are contributing to the recent cost cutting trends in the ETF space," says Wayne Bland, a financial advisor with Metro Retirement Plan Advisors, in Charlotte, N.C. "The first is competition. Many new issues including Goldman Sachs and John Hancock entered the ETF market, and nearly every week we're seeing new ETF products introduced. This product crowding is driving competition between issuers in terms of offerings, performance and pricing."
The second factor is the recently-enacted Department of Labor Fiduciary rule, Bland says.
"While the rule currently focuses on retirement accounts, we're entering a new era of fee and compensation transparency across all client relationships, which is a good thing," he adds. "As a result, advisors and investors are becoming more cognizant of investment costs."
Bland notes that ETF assets under management jumped 35% in 2015, as more investors latched on to lower-cost investment fund access.
"Now, as investment costs continue to decline, investors will benefit by stronger net of expense returns," he says.
Others point out that, with so many similarly-modeled funds available, costs are a big deciding factor for investors.
"As indexing gains popularity, the only differentiator between funds is their expenses," notes Matt Hylland, founder of Hylland Capital Management, in Norfolk, Va. "If one S&P 500 index fund charges 0.05% and the other charges 0.1%, why pay more for the same product?"
While fee declines are moving in the right direction, Hylland cautions investors not to get too excited about the latest round of ETF fee cuts.
"These specific fee reductions announced by Blackrock and Schwab mean very little for current investors - a savings as little as $1 per year for each $10,000 invested," he says. "But, the price war among index funds is having a broader effect on expenses across the industry. Fees on hedge funds, mutual funds and active ETFs are all coming down, and that is a much bigger deal for investors."
Joseph Hosler, managing principal at Auour Investments in Boston, calls the ETF fee-cut trend "very real" and "very material to the investment industry."
"Advisors and investors are quickly coming to realization that the active management approach used for the past 20 years can no longer be justified," Hosler explains. "Passive investment vehicles, typically at 10% of the price of active mutual funds, have shown success in rising and falling markets. They've consistently beat over 75% of the active stock pickers."
Hosler sees similarities between the current ETF market and the telecom industry 20 years ago.
"In some ways, this reminds me of the pricing wars between long distance phone providers in the mid to late 1990's," he says. "The mentality towards value and the access to less expensive access is not good news for the old incumbents, in this case, the active mutual fund industry."
In the end, the latest round of ETF fee cut comes down to volume, and down to money.
"It's all about market share," says Timothy Shanahan, president of Compass Capital Corporation in Braintree, Mass. "Qualified plans and individual investors are more and more cost conscience. ETFs are the lowest cost option and shaving basis points off costs can mean the difference in receiving the mandate to fill an asset allocation."
For ETF investors, that really is good news.
"The lower your investment costs, the more of your returns you get to keep," Shanahan says.