Some trends hang around in plain sight. At some point the trend reaches some tipping point. We seem to reaching that point when it comes to falling ETF fees. Jason Zweig and Sarah Krouse at WSJ have a big article up exploring the trend of falling ETF (and mutual fund) fees. They write:
The cost of investing is tumbling toward zero for some basic portfolios of stocks and bonds as firms duel for customers. The slide has been under way for years but is accelerating as the industry’s biggest companies target increasingly cost-obsessed investors.
This trend is nothing new. A couple of weeks ago we talked about the idea of “cost being the new performance.” For years now Matt Hougan at ETF.com has been tracking the lowest cost ETFs that make up a globally diversified portfolio. Those costs have been falling for years now. These falling fees are now finally hitting the bottom lines of asset managers.
Zweig and Krouse note that only the biggest and most-efficient fund managers can make a profit with ETF fees as rock-bottom levels. That being said all of the major asset managers are rushing headlong into the ETF space because they see this as the one distribution channel that is growing.
A challenge for investors is that managers see these low-cost, index ETFs as a teaser for more expensive products like actively managed ETFs. Again this not a new certain. All the way back in 2010 we described the strategy of ETF providers as akin to a supermarket where the healthy items sit alongside the outside of the store with the hope you will go through the other aisles where the higher profit, less healthy items reside.
Even active strategies are at-risk of falling fees. Goldman Sachs ($GS) recently launched the ActiveBeta U.S. Large Cap Equity ETF ($GSLC) that only charges 0.09% per annum. This strategy now competes against other factor-driven and active ETFs that charge much higher fees. In short, it isn’t clear that there is much room to hide for managers looking to pursue a high fee-low fee sort of strategy.
Two years ago we had a post up that explored this trend of falling commission, fund expenses and portfolio fees as they all head toward 0.0%. The question I asked is will this change how you invest? In a very real sense there has never been a better time to be an investor. However low costs can redound on investors and managers alike. We should think carefully about our own behaviors as we traverse this new world of cost-obsessed investors and nearly “free” investing.