Fee war changes ETF industry

26 June 2019

The exchange traded funds (ETFs) in the US have been consistently squeezed by increased competition, which combined with new fintech entrants, forced costs sharply lower, according to a report by JP Morgan.

This resulted in average fees paid across US ETFs fall by around 40 per cent since 2012, from an assets under management (AUM) weighted average of around 33.5 basis points to 20.5 bps.

Of this, equities showed higher fee sensitivity compared to fixed income, with equity funds with the cheapest fees attracting 82 per cent of all net inflows over the past five years while the equivalent figure for fixed income ETFs stood at 55 per cent.

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Following this, ETFs providing exposure to individual countries or international sectors and themes saw single-digit percentage fees declines and commodity funds on average saw no decline.

On the other hand, niche products saw the smaller fee declines which could be explained by the fact they had smaller pools of assets and they faced less competition.

Also, actively managed ETFs saw a smaller decline in fees compared to passive ETFs in recent years as investors focused more on active funds’ returns/ alpha than cost and their differentiated strategies which would result in less competition.

“Almost all of the decline in AUM-weighted fees for actively managed funds came over the past year and most of this decline is due to investor flows into lower fee actively managed funds, rather than expense ratio cuts by the funds themselves,” wrote JP Morgan global quantitative and derivatives strategists, Marko Kolanovic and Bram Kaplan.

The report also found that the ETF fee war forced major ETF issuers to relaunch or rebrand lower fee versions of simple market beta or “core” products in order to capture flows.

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