Within the past 48 hours, two midtier ETF issuers have launched what appears to be a new phase of fee compression in ETFs—specifically, smart-beta ETFs.
Today Guggenheim announced it would literally halve the cost of its largest fund, the $13 billion Guggenheim S&P 500 Equal Weight ETF (RSP), from 0.40% to 0.20%. And shortly before that, WisdomTree slashed the fees on four of its alternatively weighted emerging market ETFs by nearly 50%. Both sets of changes will be effective June 30.
RSP Fees Halved
The move by Guggenheim is particularly breathtaking—RSP is its largest ETF, by a magnitude of nearly seven. Bloomberg ETF Analyst Eric Balchunas estimates the firm has given up $27 million a year, or somewhere near a third of its profits.
“It’s painful for them, but it’s smart,” Balchunas said of Guggenheim’s move.
It’s an act that could be termed “preservation through cannibalization.” After all, Goldman Sachs filed back in April for its own U.S. large-cap equal-weighted ETF that would compete directly with RSP. Although the Goldman filing has not been updated with an expense ratio, Goldman has proven it has no compunction about coming out of the gate with aggressive pricing.
“In essence, one of [Goldman’s] moves is to be the Vanguard of smart beta. Guggenheim saw that filing, I’m sure, and said, ‘It’s a jungle out here, but you’re not going to eat us—we’re going to eat ourselves first,” Balchunas said, citing a quote by Steve Jobs that you can’t be cannibalized if you cannibalize yourself first.
The ETF Jungle
“I’ve never seen that massive a cut. They just basically killed Goldman’s entire point for launching that product in one shot,” he added. “This is life in the ETF jungle. This is how you have to live to survive.”
When Goldman launched its large-cap smart-beta ETF, the flagship of its ActiveBeta family, the fund had an expense ratio that was equal to that of SPY. The Goldman Sachs ActiveBeta U.S. Large Cap Equity ETF (GSLC) comes with an expense ratio of just 0.09%.
With RSP representing so much of Guggenheim’s assets, the firm apparently decided to put a decisive moat around its most popular fund, with an aggressive price cut.
Balchunas points out that Goldman’s pricing practices were expected to be the main appeal of its proposed equal-weight fund.
Race To The Bottom
“There’s not many companies that have put themselves in this kind of playing shape for the ‘Vanguardian future,’” Balchunas said of Guggenheim, noting that after a market downturn, a company like Guggenheim could be more valuable than firms that are currently bigger and more established.
Balchunas speaks of the “Vanguard effect.” The firm came into the ETF space and rapidly gathered assets through its established audience and its low fees. Goldman has mimicked that strategy successfully with the launch of GSLC, which is already a $2.3 billion fund.
“This is all just a huge race to the bottom,” he added.
WisdomTree’s EM Funds
Although not approaching the dramatic nature of Guggenheim’s fee cut, WisdomTree was itself very aggressive in trimming fees on four of its funds.
The cuts are as follows:
WisdomTree Emerging Markets Consumer Growth Fund (EMCG), cut from 0.63% to 0.32%
WisdomTree Emerging Markets Quality Dividend Growth Fund (DGRE), cut from 0.63% to 0.32%
WisdomTree China ex-State-Owned Enterprises Fund (CXSE), cut from 0.53% to 0.32%
WisdomTree Emerging Markets ex-State-Owned Enterprises Fund (XSOE), cut from 0.58% to 0.32%
However, these funds are tiny compared to RSP; DGRE is the largest, at $55 million. The move was likely made with the hope of driving additional assets to the funds at a time when emerging markets—especially China—are getting more attention.