One of the primary reasons exchange-traded funds continually take market share from actively managed mutual funds is lower fees. Data confirm as much. Just look at this year's most popular ETFs in terms of new assets added. Many of those funds can be considered “cheap” as they have expense ratios of 0.2 percent per year or less. In some cases, 2017's most popular ETFs even have annual fees of below 0.1 percent.
“According to Eric Balchunas, ETF Analyst at Bloomberg Intelligence, ETFs with expense ratios of 20 basis points or lower pulled in 79 percent of all ETF inflows in the past year,” said CFRA Research director of ETF & Mutual Fund Research Todd Rosenbluth in a note out Tuesday. “During a typically slow August, some firms took steps to further shake up the industry and benefit from the focus on low-cost products.”
ETF issuers are not shy about indulging investors' thirst for bargains. In addition to rampant fee reductions, a trend that is likely to continue, some issuers will simply introduce cheap ETFs, potentially staving off the need for near-term fee cuts. Additionally, some issuers are re-configuring existing products and paring fees on those funds. However, there are examples of issuers having dominant market positions where premium fees can exist.
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As CFRA notes, BlackRock Inc. (NYSE: BLK)'s iShares unit, the world's largest ETF issuer, has a dominant position when it comes to single-country ETFs. That includes dominant perches in both developed and emerging markets single-country funds, enabling the issuer to resist dramatic fee reductions on those funds.
“iShares has long been the leader in single country unhedged international equity ETFs,” said Rosenbluth. “The firm had $69 billion across 65 single country ETFs in late August according to iShares, including $16 billion in iShares MSCI Japan ETF (NYSE: EWJ) and $4.8 billion in iShares MSCI Germany ETF (NYSE: EWG). Beyond these and other developed markets, the firm offers diversified and liquid exposure to emerging markets such as Brazil, China, and India.”
Although EWG and EWJ are not the only Germany and Japan ETFs on the market, the funds both charge 0.48 percent per year.
Plenty Of Competition
There are plenty of ETFs on the market that are somewhat similar to each other, which often breeds lower fees. For example, the Deutsche X-trackers Japan JPM-Nikkei 400 Equity ETF (NYSE: JPN) will lower its fee to 0.15 percent per year from 0.4 percent.
At the same time, the firm plans to convert Deutsche x-Trackers MSCI Italy Hedged Equity ETF (NYSE: DBIT) into Deutsche x-Trackers Germany Equity ETF. A third ETF, Deutsche X-trackers MSCI Southern Europe Hedged Equity ETF (NYSE: DBSE) will change to Deutsche X-trackers Eurozone Equity ETF,” said Rosenbluth. “Both DBIT and DBSE will cease their existing currency-hedged approach, will track indices from Solactive and have expense ratios of 15 basis points.”
Both of those ETFs currently charge 0.45 percent per year.
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