Wall Street players that are offering exchange-traded funds for the first time may force a new wave of cost cutting in the industry.
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Existing issuers have been slashing expense ratios in recent years, vying for assets among more than 2,200 products available. Yet this summer, signs emerged that the competition could only go so far, with one zero-fee fund shuttering and another product that used to pay investors who held it changing course to charge fees of 29 basis points, or 0.29%.
Now asset managers that had been longtime ETF holdouts — including Wells Fargo, Federated Investors and Dimensional Fund Advisors — are finally diving in. They may reignite the price wars.
“You have seen new entrants push the envelope, and they’re able to use their scale to bring product to market at a very low cost,” said Jillian DelSignore, principal at Lakefront Advisory.
Making an Entrance
DFA recently disclosed prices for three upcoming ETFs, with its U.S. domestic-focused product (DFAU) and international developed fund (DFAI), charging only 12 and 18 basis points, respectively.
The average expense ratio for all U.S. ETFs is 52 basis points, while the asset-weighted average — which takes into account how many assets each fund has and gives higher weight to the larger funds — is 19, according to data from Bloomberg Intelligence.
Race to Zero
DFA’s low-cost products are likely designed to compete with Avantis, a unit of American Century Investments run by former DFA officials, said James Seyffart, ETF analyst at Bloomberg Intelligence. Avantis launched five active ETFs about a year ago, with its U.S. domestic fund (AVUS) costing 15 basis points and its international developed one (AVDE) charging 23.
Avantis may soon feel the competition. “Basis points do move assets around,” Seyffart said.
Wells Fargo and Federated haven’t launched their funds yet. But other new issuers have come ahead this year with low fees. BNY Mellon launched BKAG, the first zero-fee bond fund in March, as well as another zero-fee product tracking big American companies, the BNY Mellon US Large Cap Core Equity ETF (BKLC).
For asset managers launching new products into an already-mature $4.7 trillion industry, low fees are one of the few ways to compete with legacy firms like BlackRock and Vanguard, which currently control 66% of U.S. ETFs.
“You can’t come 26 years and nearly $5 trillion late to the ETF market and charge a premium fee and expect to gather assets,” said Todd Rosenbluth, director of ETF and mutual fund research at CFRA Research. “The Dimensional Funds pricing, while absurdly low, is quite reasonable in this environment.”
Even the legacy players are releasing cheap products. In late September, BlackRock came out with a long-dated Treasury bond fund (GOVZ) and its ESG Screened S&P 500 ETF, charging 7 and 8 basis points, two of the lowest-priced funds to begin trading this year.
Read the full article here by Claire Ballentine, Advisor Perspectives
