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ETF Fee War Ups Competition in Fund Industry: Fitch


The ETF fee war is great for investors who reap the cost savings but is squeezing profits in an increasingly competitive mutual-fund business, a ratings agency said Tuesday.

“Price competition among providers of mutual funds and ETFs is likely to put pressure on investment management fee growth for U.S. trust and custodial banks,” Fitch Ratings said.

“Recent moves by Fidelity, Vanguard, Schwab, Blackrock, and other fund managers to reduce index fund and ETF fees paid by increasingly cost-conscious investors will make it difficult for trust banks, such as State Street, Northern Trust, and Bank of New York Mellon, to push through meaningful fee growth on individual and institutional customer accounts,” the firm said in a note.

The average cost of an ETF is around 0.45% and some providers are cutting expense ratios to the bone at diversified core products. [Investing on a Shoestring with Low-Cost ETFs]

“Offering the lowest fees in a product category has been a strategy for several entrants, with some incumbents responding with price cuts,” says Morningstar analyst Robert Goldsborough. “And in recent years, brokerage platforms have partnered with ETF issuers to offer commission-free trading of select ETFs.” [A Deeper Look at the ETF Fee War]

The ETF fee war has forced some U.S. banks to adjust pricing strategies in ways that may erode profitability, Fitch said.

“This price competition is particularly relevant in the plain vanilla index space, which serves to replicate investment returns of bellwether indices such as the S&P 500 and Dow Jones Industrial Average, among others,” it added.

“Since the financial crisis, net outflows from actively managed funds into index products and ETFs have made it more difficult for managers of higher cost products to compete. The growth of ETFs, with low expenses and no restrictions on trading throughout the day, is posing a threat to actively managed funds in both the retail and institutional channels,” Fitch said.

“Furthermore, we think that a race to the bottom in fees for index funds and ETFs likely signals the growing importance of scale in the asset management business, with slow fee growth and lower margins discouraging market entry by competitors,” the ratings agency pointed out. “In a more mature industry, with consolidation largely complete, smaller competitors in the index fund and ETF space will find it increasingly difficult to challenge incumbents, while future price competition from the existing large incumbents is likely.”

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