The Latest Shot in the ETF Price Wars

The Latest Shot in the ETF Price Wars

High investing costs are the biggest enemy that investors face. Whether it’s a commission you have to pay to buy shares, or an expense ratio that gets taken automatically from your assets, every dollar that goes toward exchange-traded fund fees is one less dollar for you to spend in retirement.

Fortunately for investors, ETF providers have been fighting each other on the price front, and expense ratios have come down so far that the idea of a zero-cost ETF doesn’t seem all that outlandish. ETFs have kept drawing assets as the bull market continues, and companies like BlackRock (NYSE: BLK) , State Street (NYSE: STT) , Vanguard, and Charles Schwab (NYSE: SCHW) all want to find ways to distinguish their fund offerings and draw customers. The latest move from State Street took the march toward 0.00% one step further.

What State Street did

State Street Global Advisors runs the popular SPDR family of ETFs, including the groundbreaking SPDR S&P 500 that helped to ignite the ETF revolution. State Street is the third-largest ETF provider behind BlackRock and Vanguard, and it wanted to make a competitive effort to get its market share back to the No. 2 spot.

What State Street decided to do was to cut its expense ratios on 15 of its ETFs. The 15 ETFs span the investment universe, including stocks of all sizes and from all geographical regions, as well as a wide variety of bond-oriented ETFs that incorporate both corporate and Treasury bonds. With the exception of one emerging-market ETF, the 15 funds will all now feature expense ratios between 0.03% and 0.07%.

Mosaic with letters ETF in white blocks against a gold-block background.

Image source: Getty Images.

Interestingly, the SPDRs generally weren’t all that expensive before. The bond ETFs had fees in a range from 0.08% to 0.12%, and the SPDR domestic stock funds cost between 0.10% and 0.15%. Those amounts are far lower than what BlackRock charges on some of its most popular ETFs, but it had proved insufficient for State Street to avoid losing ground to Schwab and Vanguard.

Schwab, in particular, has been aggressive in offering low-fee funds, wanting to appear at the top of lists of lowest-cost ETFs. That’s consistent with Schwab’s recent marketing messaging, in which it has bragged about its recent stock-commission rate reduction and other investor-friendly moves to reduce costs in order to woo customers from higher-fee rivals.

Protecting an oligarchy

State Street’s move highlights one of the advantages that first-movers in the ETF industry were able to develop and now are striving to sustain. SPDRs already have hundreds of billions of dollars in assets under management, so State Street can make these moves to appeal to its existing customer base without having to focus as much on drawing new business.

That stands in stark contrast to Schwab, which was late to the ETF game and had to break its way into the market by making the low-cost argument. Even with its aggressive efforts, Schwab had drawn only about $80 billion in assets as of earlier this year, although that’s enough to rank it among the top five ETF companies in the market.

State Street also chose to protect its biggest moneymaker from any changes. The SPDR S&P 500 ETF, which has more than $250 billion in assets under management, wasn’t included among the funds cutting their costs. At a bit above 0.09%, the SPDR S&P 500 ETF doesn’t have an exorbitant cost structure, but it’s still well above the 0.03% to 0.04% that similar funds from Schwab and Vanguard charge. Yet even a few hundredths of a percentage point adds up to big money for State Street, and it wasn’t ready to make that big a commitment toward the low-cost ETF trend.

What’s next for ETFs?

Even BlackRock hasn’t been immune to the trend toward lower costs. The company behind the iShares line of funds introduced core series ETFs , a new class of low-cost funds designed for individual investors, back in 2012. With a segregated approach, iShares was able to keep bringing in much higher fees on its existing, much larger ETFs. By contrast, the State Street strategy will mean that SPDR users of all kinds will see lower costs, even if only some of them were truly price sensitive enough to consider switching.

For the typical investor, fees below 0.1% are small enough to make further differences relatively insignificant. At that point, other costs, such as commissions and the bid-ask spread when you purchase and sell shares, become important considerations, as well. Here, too, having critical mass of assets under management is essential, as greater volume typically produces narrower spreads that save you money when you trade your ETF shares.

ETFs have been a valuable tool for investors to get diversification at low cost, and their popularity should continue to rise. As costs approach zero, even the stingiest of investors will be able to take a closer look at how ETFs can boost returns and become useful tools within investment portfolios.

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