Another Reason To Love ETFs....Fees Keep Coming Down!

There are a lot of reason to love ETFs but one of the main considerations for investors is that they are cheap in terms of investment management fees and those fees keep coming down.  Below is the fee structure for a selected list of ETFs in the smart-beta category.  For practical consideration we'll define smart-beta as an ETF management concept that combines certain aspects of active investment management on top of a passively designed portfolio.  This category has exploded in the past couple of years and has traditionally been able to charge more for the assets under management, under the theory that the active management portion of the portfolio was worth more than a traditional passive ETF.  

In the chart above {linked below} you can see some of the more larger smart-beta ETFs charge on average about 18 basis points and if you take the Vanguard funds out of the equation then the average amounts to around 25 basis points.  By comparison, a typical run of the mill passive index fund on a major market index usually charges between 4 and 10 basis points and most mutual funds have costs between 85 and 125 basis points {.85%-1.25%}.  The cost differential is one of the main reasons mutual funds have been hemorrhaging assets these past few years.  

Now the fee structure for higher cost smart-beta ETFs may be under pressure as well.  Goldman Sachs is getting into the smart-beta game, filing for an equal-weighted S&P 500 product with a fee structure  of .09 basis points {.09%}.  The blog Market Watch in an article linked below quoted Stephen Tu, a senior analyst at Moody’s who noted the following:

{Goldman’s} "move expands the ETF price war beyond plain vanilla ETFs into smart-beta ETFs, implying that the industry’s higher pricing assumptions for smart-beta products will not hold......The plain vanilla ETF category has experienced a severe price war in which products pricing has migrated toward zero basis points, and this aggressive price competition is migrating up toward the smart-beta category....As a result, much of the hope and investment traditional managers placed into smart beta as a product salvation may be at risk. This is negative for traditional active managers that move into this space and expect to charge active light management fees, but will rather face a more index-like pricing environment.”

Fees are not the only consideration when investing in an ETF and at some point the price differential may make no difference.  After all the average investor is hardly going to notice the difference in portfolio performance between a fund that charges say 10 basis points versus 11.  However, funds being forced to shave something like 20 basis points off of their fee structure is something that has the potential to impact a client's portfolio.  Especially for funds that have had decent longer term performance.  My prediction if this continues is that you'll see a lot of the 2nd tier players in the ETF space either close funds or sell out.  Going to be hard for some of these companies to compete if they don't have the same economies of scale as a Vanguard or maybe even a Goldman Sachs.  Just another feather in ETF's cap.

*Of the funds shown in the chart above we own DVY, SDY and RSP in client and personal accounts although positions can change at any time.  We reserve the right to change these investments without notice on this blog or via any other form of verbal, written or electronic communication.

Article Link:  {Via Abnormal Returns.com, Market Watch:  "Fee War Expands, Bringing More Pain To Active Managers"

Chart Link: Abnormal Returns.com:  "Chart of the Day-09.18.17"

Back early next week.