The exchange traded fund industry is in direct competition with the mutual fund business as far as fees are concerned. Another direct competitor to the ETF industry is itself, as ETF providers are contending to have the lowest fees in the business.
“While many products may appear similar on the surface-with similar industry, holdings, and market cap focuses-the expense ratio can often be the main, and usually key, difference between two products. After all, why would investors want to pay three times as much for virtually the same product?” asks Zack’s ETF Research.
Price has become the deciding factor in the ever-growing ETF universe. The long term effect of this tactic is not yet known, but for now, investors can enjoy the convenience of owning low cost ETFs while preserving principle. In many cases, holding a higher-priced fund may be more beneficial, but at the least, the ETF fee war is an effective marketing tool, reports Liam Pleven for The WSJ.
The expense ratio of an ETF refers to the total percentage of fund assets that are taken on a yearly basis to pay for administrative, management, advertisement, and operating costs. on Average, these costs are much smaller for ETFs compared to mutual funds, and cost still plays a dominant role in fund selection from a sector. [Vanguard Cuts Redemption Fees]
“You saw some competition on price really start to work” last year, when some of the more-expensive ETFs, including SPDR Gold Shares, saw net outflows of investor funds while lower-priced competitors, including iShares Gold Trust, saw money come in, says Matt Hougan, president of ETF analytics at IndexUniverse.com. [Copper ETFs Cuts Fees]
Even is investors are attracted to lower fees, there are instances when a more expensive fund will be a better decision: [Why Vanguard is Leading ETF Inflows for 2012]
- Cashing out of a fund just to shift their money to a lower-priced competitor could backfire if the sale triggers a tax bill on any gains from the first fund.
- For people looking to invest new money, higher fees may be worth it in some cases. SPDR Gold Shares (GLD - News) and iShares Silver Trust (SLV - News) are more appealing to active traders than their lower-fee competitors because the pricier funds are so much bigger,Phil Blancato, chief executive of New York-based Ladenburg Thalmann Asset Management, said.
- For a long term investment, lower fees can make a bigger difference. For a trader, the larger, pricier funds could be a better bet because there is more liquidity and less difference from what a seller is asking and what a buyer will pay. [How ETFs Save on Fees]
Some investors are taking advantage of the ETF fee war and are able to build a solid, diversified portfolio for under 25 basis points. Some broad-based, core holdings can cost as little as 0.12% for the year.
Tisha Guerrero contributed to this article.