Lowest-fee ETFs lead in race to zero

Fierce competition continues among exchange-traded funds, with declines varying across different categories

Lowest-fee ETFs lead in race to zero

The continuing fee wars in the fund industry has benefited investors massively, with a recent Morningstar study finding that Americans saved over US$5 billion from fund-fee reductions last year. And even focusing on the ETF segment of the market doesn’t seem to change the picture that much.

According to newly released research from J.P. Morgan, average ETF fees in the US have tumbled by some 40% over the last eight years — from an AUM-weighted average of around 33.5 basis points in 2012 to some 20.5 basis points today — as issuers scramble to take market share from obstinately cost-conscious and passive-investment-focused investors.

“This lower fee trend has been driven both by investor flows gravitating towards lower fee funds within each region and asset class and the move by ETF issuers to selectively cut the expense ratio on a number of funds,” said J.P. Morgan Global Quantitative and Derivatives Strategists, Marko Kolanovic and Bram Kaplan.

Data from the JP Morgan Quantitative and Derivatives Strategy team and Bloomberg showed a broadly declining trend in other regions. Asset-weighted ETF fees in Asia dove even deeper than in the US, going from roughly 43 basis points in 2012 to 21 basis points currently. Average fees for Canada-listed ETFs saw a shallower descent, going from approximately 41 basis points in 2012 to around 33 in 2018 before recovering to around 34 basis points as of May 2019.

Vanguard led the low-fee trend, cutting fees across 21 of its largest ETFs — which together account for an estimated US$660 billion in AUM — this year alone. The reductions are forecast to provide annual savings in the neighbourhood of US$88 million for investors.

“Funds in the lowest quintile by expense ratio, or those with an expense ratio of less than or equal to 24 bps, attracted around 80% of all net inflows to U.S. ETFs over the past five years,” Kolanovic and Kaplan said. The trend in low-fee ETFs mirrored Morningstar’s recent findings on the broader US fund industry.

And the gap seems to be widening. Compressing the time frame to include just the past year, they found that ETFs in the lowest-fee quintile attracted 97% of the US$300 billion in net new cash invested into US ETFs.

Dividing the field by ETF type shows differences in the low-fee trend’s impact. Asset-weighted fees for ETFs with broad US equity and fixed-income exposure have fallen by around 40% since 2012, while sector and factor ETF fees slipped by a more modest 25%. Single-country, thematic, and international sector funds saw single-digit percentage declines, while commodity funds saw no decline on average. J.P. Morgan attributed the resistance of niche funds to fee erosion to their lower economies of scale, lower degree of competition, and higher trading costs from lower liquidity.

Active ETFs and passive funds both declined by 9 basis points from 2014 to 2019 on an AUM-weighted basis. However, the bank said the decline represented just a 15% drop on average for actively-managed funds, compared to 32% for passive funds.

“[M]ost of this decline is due to investor flows into lower fee actively managed funds, rather than expense ratio cuts by the funds themselves,” Kolanovic and Kaplan noted.


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