Exchange traded fund providers are beginning another round of price wars, and this time the three largest asset managers are in the mix. The good news for investors is that the probability of getting a great product for a bargain just got better.
The three largest ETF providers are quickly slicing up their management fees in an effort to gain the most market share in this fast-growing business. BlackRock , Vanguard and State Street are collective managers of about 84% of this $1.2 trillion industry. According to XTF data provider, the expense ratios of about 75 ETFs have been lowered this year. [Van Eck ETF Cuts Fees]
“Price can be an important differentiator, especially for attracting new money and some sponsors are lowering expense ratios to be competitive,” Ogden Hammond, a McKinsey consultant said. “It’s natural for a maturing industry to become more competitive and for margins in some segments to be squeezed.” [FocusShares Slashes ETF Prices]
There are about 1,142 ETFs that are listed on U.S. exchanges as of the end of February. At this same time, U.S. listed ETFs accounted for about 88% of all exchange traded products, reports Ajay Makan for Financial Times. [The ETF Price War Goes to Another Level]
Charles Schwab started the first price war, offering investors free trades for those with in-house brokerages. Before long, many providers had followed the move and along with the free in-house trades came fee slashing.
Overall, ETF fees have been on a downslide for several years, as more providers are launching funds. Vanguard was the token provider known for their low fees within the ETF industry, setting the bar for affordable funds. In 2011, there were about 94 fee cuts within the ETF industry, however, this years fee cuts stand out, reports Makan.
Industry insiders call the fee wars “The Vanguard Effect” in which the investor-owned fund manager has helped keep fees low and attract market share in turn. Price competition among the big three has been intense because expense ratios were already set somewhat low, as the majority of ETFs are passively tracking an index. [In the ETF Price War, the Winner Is...]
“Our competitors may call this a price war, but we are simply passing on economies of scale. If others follow suit, the result is cheaper products for investors,” said John Woerth, a spokesman for Vanguard, in the FT story.
Tisha Guerrero contributed to this article.