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ETF Fees Tumble as Price War Heats Up Among Big Fund Firms

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07/12/2018 | 02:15pm CEST

By Asjylyn Loder

A price war is intensifying in the $3.5 trillion exchange-traded fund industry, forcing some of the biggest firms to slash fees in a bare-knuckled bid to win a larger slice of the fast-growing market.

BlackRock Inc. cut fees on several stock and bond ETFs last month, while State Street Corp. introduced last fall a new low-cost lineup of more than a dozen funds. The latest volley came last week when Vanguard eliminated online transaction fees for virtually all ETFs bought and sold through its brokerage platform, including rivals' funds.

The price-cutting maneuvers illustrate the increasingly competitive nature of the fast-growing U.S. ETF market, which by some estimates could top $10 trillion in assets within the decade, as investors forsake pricey mutual funds in favor of the cheapest ETFs. ETF fees have fallen 30% in 10 years, according to Morningstar Inc.

ETFs got their start 25 years ago as a simple way to buy all the stocks in the S&P 500 but, unlike mutual funds, could be bought and sold on the stock exchange. Since 2007, U.S. equity ETFs have seen about $900 billion in inflows while $1.4 trillion has come out of domestic equity mutual funds, according to JPMorgan.

This fight for market share is a boon for investors, who can now buy funds of stocks, bonds, commodities and other assets cheaper than ever. As ETFs have grown in popularity, their costs have come down, pressuring fees on mutual funds and investment advice.

But it is a high-stakes gamble for the big fund companies, which are betting that rapid growth will offset the reduced fees. In some cases, the lower-priced funds are even stealing customers from more expensive ETFs offers by the same firm.

"The writing is on the wall: The value of asset management is headed to zero," said Dave Nadig, chief executive of ETF.com, an industry publication owned by Cboe Global Markets.

The cheapest ETFs now cost just $3 a year for every $10,000 invested, and some analysts predict that even those meager fees could shrink even further. Of the new money that has flooded into ETFs in the past year, more than three-quarters has gone into funds that cost $15 a year or less for every $10,000 invested, according to a report from JPMorgan Chase & Co.

The ETF price wars began in earnest in 2012, when BlackRock launched its ultracheap iShares Core ETFs to stave off the rapid gains made by Vanguard's low-cost funds.

By most accounts, it succeeded. Since then, BlackRock's share of the U.S. ETF market has stabilized at about 40%, and the firm remains the largest ETF provider.

"Even if prices come down more, we expect volumes to grow to such a degree that profitability will expand over time," said Martin Small, head of BlackRock's U.S. iShares business.

State Street, by contrast, long resisted pressure to offer ultra-low-cost ETFs. That is a big reason why its share of the ETF market has sunk to less than 18% and it was overtaken in 2015 by Vanguard as the second largest provider, analysts say.

In October, State Street finally capitulated, overhauling 15 ETFs, slashing prices and striking a deal to be the exclusive commission-free provider on TD Ameritrade's brokerage platform. Since then, those 15 funds have picked up $15.7 billion.

"Obviously we're a little late," said Matt Bartolini, head of research for State Street's ETF business. He added that their low-cost strategy focuses on reducing the "total cost of ownership," such as trade commissions and transaction costs that can be a drag on thinly-traded funds.

Vanguard's decision to waive trade commissions even on rivals' funds challenges pay-to-play arrangements like BlackRock's deal with Fidelity Investments and Charles Schwab's ETF OneSource, where issuers pay to be included in commission-free lineups -- something Vanguard has long refused to do.

"It's a signal," said Ben Johnson, head of U.S. ETF research for Morningstar. "It says 'Vanguard will not pay for preferential treatment on anyone else's platform, and we don't think our competitors should have to do it either.'"

"We come in and we lower prices for all investors across the board," said Freddy Martino, a spokesman for Vanguard.

While cutting fees has been a successful way to win market share, it could backfire if growth stalls. There are also signs that low-cost funds may cannibalize assets from more expensive legacy ETFs that have long been favored by large institutional clients.

Earlier this year, Bank of America Merrill Lynch sold a sizable slice of its holdings of the iShares MSCI EAFE ETF, which invests in developed markets outside of North America, in favor of a similar but cheaper Core fund, in part because of the lower price, according to company filings and people familiar with the change.

So far this year, assets in the Core ETF have jumped by $16.1 billion while the legacy fund, which costs four times as much, has shrunk by $11.8 billion.

That asset shift, along with similar reversals in its emerging markets ETFs, represents almost $74 million a year in lost ETF fees for BlackRock. Regardless of those tactical moves, BlackRock's profitability has continued to grow, Mr. Small said.

"I don't think anyone likes to lose revenue, but in the long run what's the alternative?" said Mr. Johnson. "There is no other option. You have to do it just to have a seat at the table now."

Write to Asjylyn Loder at [email protected]

Stocks mentioned in the article
ChangeLast1st jan.
DJ INDUSTRIAL 0.18% 25064.36 Delayed Quote.1.21%
NASDAQ 100 -0.24% 7357.8986 Delayed Quote.15.31%
NASDAQ COMP. -0.26% 7805.7188 Delayed Quote.13.36%
S&P 500 -0.10% 2798.43 Real-time Quote.4.78%
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Sales 2018 14 835 M
EBIT 2018 5 885 M
Net income 2018 4 494 M
Finance 2018 5 925 M
Yield 2018 2,31%
P/E ratio 2018 18,31
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