When people talk ETF fee wars, they tend to talk about Schwab,
Vanguard and iShares battling it out over who has the lowest-cost
emerging markets ETF.
This mattered a lot a few years ago, when providers were
charging crazy-high prices for simple beta exposure. But today,
we're talking pennies. When I can buy a diversified portfolio of
with a blended expense ratio of 0.0865 percent per year, the battle
for low-cost core exposure has reached the point of diminishing
That's not to say, however, that the ETF fee war is over. Far
from it. I expect it to rage hotter than ever in 2013, as it
spreads from the battle over core exposure into other areas of the
Here are three hot spots I'm monitoring in the year to come.
1) IAU vs. GLD
Gold is a commodity. By definition, two ETFs that hold gold
bullion should deliver identical performance. Therefore, if you're
choosing a gold ETF, you should choose the one with the lowest
iShares was late to the gold ETF party. Its gold bullion ETF-the
iShares Gold Trust (NYSEArca:IAU)-launched on Jan. 21, 2005, a
little more than two months after SSgA launched the SPDR Gold
Shares (NYSEArca:GLD) on Nov. 18, 2004.
The two funds charged the exact same expense ratio and do the
exact same thing, holding gold bullion in a vault. But with
first-mover advantage (and a friendlier ticker), GLD gathered
almost all the assets. By June 30, 2010, GLD had $52.8 billion in
assets, while IAU had just $3.4 billion.
But on July 2 of that year, iShares slashed the fee on IAU from
0.40 percent to 0.25 percent, undercutting GLD's expense ratio by
nearly 40 percent. Since then, IAU has dominated GLD on a net flows
- IAU:$6.8 billion in net inflows
- GLD:$2.8 billion in net inflows
You have to be very careful looking at those numbers. I'm not
implying a one-for-one switch here. Instead, what's happening is
that IAU and GLD are dividing the market.
With its lower expense ratio, IAU is attracting financial
advisors and retail investors who care a great deal about the
"all-in fee" of their portfolios.
But GLD retains an important advantage over IAU for some
investors. Both products trade at an average spread of $0.01/share.
But because GLD has a larger share price-one share of GLD costs
$163.09, while one share of IAU costs just $16.39-GLD is cheaper to
trade on a percentage basis.
That goes double for institutional investors:Unlike retail
investors, who might pay $9.99 for a trade of any size,
institutions often pay commissions on a "pennies-per-share" model.
Fewer shares = lower commissions, making GLD even cheaper for
Thanks to these trading efficiencies, GLD attracts the bulk of
institutional and "hot" money. At the same time, IAU's low price
clearly appeals to the advisor community and those who are buying
for the long haul.
What will happen here?
A divided market.
I bet IAU's assets will continue to grow faster than GLD, as it
becomes the fund of choice for retail investors and advisors. GLD
will remain the behemoth, however, by appealing to institutions and
the trading community.
It's a split I expect to see more of:Low-cost products that
resonate with the advisor community and higher-cost products
designed for traders and institutions.
2) EEM vs. IEMG
I think the most exciting fee war-the place where investors
stand to gain the most by making a move-is between the iShares MSCI
Emerging Markets Index Fund (NYSEArca:EEM) and the iShares Core
Emerging Markets ETF (NYSEArca:IEMG).
It may seem strange to have a fee war
a single company, but iShares was forced into it and has handled it
iShares' $50 billion flagship emerging markets product, EEM, had
been losing ground to lower-cost rivals for years. Rather than cut
its fee ( around 0.66 percent) and sacrifice millions in profits,
iShares introduced a lower-cost version charging just 0.18 percent
per year, or $18 for each $10,000 invested.
That's cool, but here's the kicker:The new fund also offers
Many investors overlook the fact that EEM excludes small-cap
stocks; it is the Russell 1000 of the emerging markets world. IEMG
holds all the same stocks as EEM, plus small-caps:Think of it as
the Russell 3000.
Given a choice, I'm guessing investors want fuller exposure.
Small-caps are the most dynamic corner of the emerging markets
space, and investors should want them in their portfolios.
What's odd is that, since the launch of IEMG on Oct. 18, 2012,
in asset gathering, pulling in $11.8 billion, while IEMG gained
just $290 million.
Part of that is driven by Vanguard's decision to change the
benchmark on the Vanguard FTSE Emerging Markets ETF (NYSEArca:VWO).
Previously, VWO tracked the same MSCI index as EEM. As it shifts
from MSCI to a FTSE index, investors benchmarked to the MSCI index
seem to be moving to EEM to maintain consistent exposure.
But the ultra-low numbers for IEMG surprise me. The fund is
much, much cheaper
than EEM, and it trades fairly well. Long-term investors and
advisors who don't worry about benchmarking risk should buy it in
I think that will happen this year. I think, by the end of the
year, IEMG will be a $1 billion product, on its way to $10 billion.
If it doesn't, it will say something very important about the
3) PowerShares vs. … PowerShares?
Some of the most interesting fee cuts of the past few years were
made by a firm not known for its low expenses:PowerShares.
Since its founding, PowerShares has promoted its products as
better-than-indexes. Sure, its charged high fees-0.75 percent for
its original flagship equity products-but they promised performance
that would justify the cost.
But in recent years, PowerShares has come to market with low-fee
offerings like the hugely successful PowerShares S&P 500 Low
Volatility Portfolio (NYSEArca:SPLV), which charges just 0.25
percent in annual fees. SPLV has been a huge hit for PowerShares,
pulling in $3.2 billion in assets since its launch in May 2011; for
many, it has become a core holding. The old PowerShares might have
priced this market-beating index at 0.75 percent. But the company
has learned:If you want to be a core holding, you have to be low
We've seen a similar thing happen with PowerShares' suite of
fundamentally weighted FTSE RAFI ETFs. The firm slashed fees on the
domestic FTSE RAFI products in 2008, and last year, yanked down
fees for the international versions from 0.75 percent and 0.80
perceent to 0.45 percent and 0.49 percent, respectively.
It lowered fees on the PowerShares S&P 500 High Quality
Portfolio (NYSEArca:SPHQ) from 0.50 percent to 0.29 percent last
year as well.
PowerShares' message to the rest of the industry is
telling:Strategy indexes work- you
sell performance in the ETF space. But if you want to do that, you
have to price things at a reasonable level.
That's why I think the fee wars are only getting started.
The ETF industry has learned that fees matter to advisors. If
you want to be at the core of investor portfolios, you have to be
priced low enough that an advisor's all-in fee (including fund
fees) stays in the 1 to 1.5 percent range, or lower. When a fund
costs 0.75 percent, it's tough for advisors to charge enough to
make a living.
Areas of the ETF market remain where fees are still stubbornly
high:commodities in particular, where issuers seem to think 0.75
percent is the bare minimum you can charge.
They get away with it, I think, because there are vast
differences between competing commodity ETFs, and the choice of
which ETF you buy matters more than saving a few basis points.
But there will come a day when an issuer offers a good
commodities strategy at 0.40 percent. And when they do, I think
they'll get asset flows.
There are other areas too. The big country funds cost too much.
Currency products are pricey. Liquid alternatives cost big. And
sponsors of active funds-PIMCO aside-need to realize that charging
relatively high fees means hurdles of outperformance is that much
Mark those down for the fee war to watch in 2013. In the core
beta space, we're reaching the end.
But everywhere else? We're just getting started.
Permalink | 'copy; Copyright 2009 IndexUniverse LLC. All rights
Don't forget to check IndexUniverse.com's ETF Data
2013 IndexUniverse LLC
. All Rights Reserved.