Following Deutsche Bank AG's (DB) decision to cut the cost of its flagship high-yield ETF, some analysts warned Wednesday that exchange-traded fund price wars are far from over and predicted that no-fee ETFs could become a reality within several years.
Deutsche Bank cut the net expense ratio of its Xtrackers USD High Yield Corporate Bond ETF (HYLB) to 0.2% from 0.25% on Monday, the latest in a series of fee reductions for an industry that some analysts say may need to trim prices much further.
Alex Bryan, Morningstar's director of passive strategies research, said fees will hit zero sooner rather than later.
"Providers are offering uber low-cost products and using them as loss leaders to get their foot in the door and offer more profitable products," Bryan said.
Deutsche Bank's move to slash fees follows the decision by investment manager State Street Corp. (SST) earlier this month to lower expense ratios on 15 of its popular ETFs, including a reduction of its emerging markets fund to 0.11% from 0.59%, making it the cheapest ETF for emerging market stocks.
The pricing war has extended to more complex and historically expensive ETFs that use alternative index construction rules instead of weighting based on market capitalization. Goldman Sachs & Co. (GS) introduced its ActiveBeta US Large CAP ETF (GSLC) with a cost of just nine basis points.
"Historically, the smart beta strategies were under a lot less pressure," said Bryan. "But now we're starting to see pressure there, too."
"Goldman jumpstarted it when they launched their product," he added. "The legacy products had been in the 20 to 40 basis point range."
Eric Balchunas, senior ETF analyst at Bloomberg LP, also said that investors could have a portfolio of free ETFs within just a few years.
"The closest to zero we're at now is around three basis points," he said. "I think we will get to our first zero within 18 months, probably for large cap or broad market equity. Across plain-vanilla ETFs, we could see zero fees within three or four years. By 2022, you should have a whole portfolio at zero."
Balchunas said that even small reductions in fees could lead to massive inflows. After BlackRock Inc. (BLK) reduced its iShares core S&P 500 ETF (IVV) fee by three basis points to 0.04% last October --making it one basis point cheaper than Vanguard's equivalent ETF, Vanguard 500 Index Fund Investor Shares (VFINX) -- millions of dollars flowed into the fund.
"If you look at the flow of S&P 500 ETFs over the past five years, it all had this normal rhythm until this past year," he said. "... I call it 'the power of the basis point.' It can direct billions of dollars."
-- Matt Sussis is a reporter for Medill News Service in Washington and a graduate student in the Medill School of Journalism. Previously, he was an equity research analyst at Credit Suisse in New York.
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