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Niche and Alternative ETFs Push Up Overall Fees


As exchange traded fund providers launch more complex and alternative strategies, the industry’s average fees are rising. Nevertheless, the majority of assets are in low-cost, beta indexing funds, which have also seen expenses slashed in the ongoing “fee war.”

In the year ended June 2013, the average expense ratio of ETFs increased to 0.62% from 0.61%, writes Rick Ferri for Forbes.

The rise in average fees is attributed to the growing number of alternative ETF strategies, including “enhanced” indexing methodologies and niche asset classes. These cost more to fun, compared to traditional market-capitalization weighted indices. Moreover, the actively managed ETF space is just beginning to grow, and active strategies tend to have higher costs.

The number of alternative index ETF strategies have grown over the past couple of years after the land grab for traditional index strategies. According to Morningstar data, the average net expense ratio of newly issued funds since 2010 is 0.70%.

While alternative strategies may be interesting, investors are still steering toward low-cost, broad index options. According to Vanguard, 74% of new asset flowed into the lowest expense quartile funds in between 2003 and 2012. [‘Fee War’ Could Hit Specialty, Niche ETFs Next]

Investors have also benefited from the so-called fee war. The cheapest ETFs, the Schwab U.S. Broad Market ETF (SCHB) and the Schwab U.S. Large-Cap ETF (SCHX) , come with a 0.04% expense ratio.

The fee war also spilled over onto brokerage platforms. Now, investors are also able to trade a number of commission-free ETFs on a number of online platforms. [Six Popular Commission-Free ETF Trading Platforms]

Additionally, as more providers enter the space and compete for investment interest in niche and active strategies, we might witness another round in the fee war to attract asset inflows.

For more information on ETFs, visit our ETF 101 category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, 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.