ETF fees’ long race to the bottom may be at an end

Average fee declines are starting to slow down or reverse as several trends take hold

ETF fees’ long race to the bottom may be at an end

For years, stiff competition for market share among ETF providers has spurred a race to zero on management fees, ostensibly to investors’ benefit. But now that dynamic appears to be losing energy.

Citing research from JPMorgan, the Financial Times reported that management fees on ETFs around the world have halted their declines, with some seeing increases for the first time.

Based on JPMorgan’s calculations, asset-weighted annual fees for U.S.-listed ETFs fell from 43% to 19% in the period between 2012 and 2020. ETFs in Europe, Canada, and Asia declined dramatically from higher bases, with Asian ETFs nosediving 51% in the seven-year period ended in 2019.

Average fees in Asia started to creep up last year, and have rebounded from 21 basis points to 26 basis points, JP Morgan said. Costs in Europe and Canada have begun to edge up, while the fall in U.S. fees has been arrested.

Not every corner of the ETF space is losing altitude on fees. The march to the bottom continues for some basic passive ETFs, including two U.S. bond funds from State Street Global Advisors whose fees were reduced from six basis points and four basis points, respectively, to just 3 basis points apiece currently.

BNY Mellon and Fidelity have rolled out a suite of zero-fee index funds. New York-based Salt Financial also boldly stepped into losing territory with a negative-fee ETF, which proved short-lived.

Asset managers are reconsidering their race-to-the-bottom strategy, JPMorgan said, as ETFs saw record inflows over the past year. Aside from announcing fewer fee cuts, numerous providers have also allowed temporary fee waivers to lapse.

Another contributing factor to rising asset-weighted fees, JPMorgan said, is the disproportionate movement of inflows into higher-fee, non-vanilla products such as thematic and active ETFs, as well as crypto ETFs outside the U.S.

ETFGI founder Deborah Fuhr told the Times that the bulk of ETF assets remain in products that come with fees lower than 20 basis points. However, the widespread uptake of ESG ETFs, which tend to be costlier than plain passive products, has also exerted upward pressure on prices.

The rise in fees has also been supported by a spate of new fund launches, especially in the Asia-Pacific region where 771 new listings have been announced so far this year.

“[R]egulatory changes have made it easier to bring product to market in Korea, mainland China and Hong Kong,” Fuhr said, noting that the new funds are being planted in previously unstaked niches where fee competitiveness is a non-issue. “I think [ETF managers] are trying to be competitive by launching new products.”


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