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ETF Clones Are Latest Salvo in the Industry Fee War

In an ever increasingly competitive exchange traded fund universe, asset managers are even undercutting themselves to attract more investors.

In the latest bid to attract investors whom are interested in cheap ETF investment options, Invesco copied its hugely popular Invesco QQQ Trust (QQQ) and launched the cheaper Invesco NASDAQ 100 ETF (QQQM), which costs 5 basis points less than QQQ.

Both Nasdaq-100 ETFs track the same index of the 100 biggest Nasdaq stocks. However, short-term investors who prioritize liquidity could still find the attributes of QQQ most appropriate while long-term or “buy-and-hold” investors may be more focused on the cost-savings of QQQM.

“QQQM with its lower management fee may appeal to long-term buy-and-hold investors,” John Feyerer, Invesco’s senior director of equity ETF strategy, told the WSJ.

Since some retail investors prioritize low fees, “this is something we heard from individual investors, and this [QQQM] should help solve that,” John Hoffman, Invesco’s head of Americas, ETFs and indexed strategies, told the WSJ.

Analysts warned that asset managers risk cannibalizing their most popular products by enticing investor assets into other funds. Invesco and other executives in the ETF industry, though, believed the copycat ETFs are necessary to compete with a growing number of rivals that are all trying to attract cost-conscious investors.

While there are over 2,200 exchange traded products listed on major U.S. exchanges, the cheapest ETFs that track broad areas of the stock market have accumulated the lion’s share of assets. According to Morningstar data, investors last year put $581 billion in the cheapest 20% of ETFs and mutual funds, whereas the others suffered $224 billion in outflows.

Additionally, the updated ETF clones could be a more efficient way to track these popular benchmarks. For instance, QQQ, which was first launched by Nasdaq in 1999, is structured as a unit investment trust and comes with a higher operating cost than other vanilla index-based ETF, along with other limitations. For example, the unite investment trust can't reinvest dividends, use index derivatives or engage in lending securities to short sellers.

Similarly, State Street Global Advisors has rebranded one of its ETFs into the SPDR Portfolio S&P 500 ETF (SPLG), which seeks to provide investment results that correspond generally to the total return performance of the S&P 500 Index. The ETF is seen as a cheaper version of the SPDR S&P 500 ETF Trust (SPY), which was also initially introduced as a unit investment trust that comes with the same limitations associated with QQQ's structure.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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