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Is the ETF Fee War Raising the Barriers to Entry?


Vanguard has taken the ETF fee war to a whole new level by shifting to new benchmarks that charge lower index-licensing fees and passing the savings along to investors.

Vanguard’s move follows plans by rivals Charles Schwab and BlackRock to slash expense ratios on their ETFs. [Vanguard Benchmark Trade Shakes Up Index Industry]

However, the ETF fee war may be raising the barriers to entry for new firms and putting pressure on smaller companies due to thinner profit margins.

“This all makes it more difficult for new entrants to successfully compete. That has cut the net increase in ETFs in the first nine months of this year to just 60, down almost 69% from 192 in the same period last year,” Reuters reports.

There have been 147 new exchange traded products launched in the U.S. this year through the end of September with $5.8 billion of assets, according BlackRock, which oversees the iShares ETFs.

Meanwhile, 59 products were delisted through the end of the third quarter due to lack of interest and trading volume. These shuttered funds represented combined assets of less than $500 million. [The 10 Top-Selling New ETFs of 2012]

During the first nine months of 2012, new ETFs launched are down 34% from the year-ago period while ETF closures have jumped by nearly 200%, according to Reuters.

Firms realize there are very few opportunities to find a niche that is not already covered, said Tim Strauts, ETF analyst at Morningstar, in the report.

There are 33 ETF providers in the U.S., but the top three firms account for 84% of the assets. [The Rich Get Richer in ETFs]

Russell Investments is closing all its ETFs except one, and Scottrade’s FocusShares is exiting the business altogether. [ETF Closures Reveal Fierce Competition for Market Share]

“It has never been easy to be in this business, but the challenges have changed,” Ben Cukier of FTV Capital said in a recent report. “It used to be that advisors didn’t know what ETFs were, but now there are thousands of ETFs out there and the challenge is how to get the advisors’ attention.” [Smaller ETF Firms Feeling the Heat Amid Consolidation]

The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.