By ETF Heat Map Team

The largest provider of ETFs, BlackRock, recently reduced management fees to as low as 0.04% on some of their iShares ETF products. Investors can now pay as little as $0.40 on a $1,000 investment or $4 on a $10,000 ETF investment. Charles Schwab also followed BlackRock’s lead and reduced ETF management fees for 15 of their funds. Eric Balchunas, an analyst with Bloomberg Intelligence, recently stated that, “While the fee war is brutal for the issuers, it is a huge win for regular investors who are now able to get an institutional-quality portfolio for under 10 basis points.”

The race to the bottom is expected to persist with rumours that Vanguard Group and Fidelity Investments will follow BlackRock and Schwab on non-differentiable plain vanilla ETFs. Increasing regulatory pressure to protect investor’s retirement savings is expected force financial advisors to choose low cost and good performing ETFs indiscriminately. Therefore, it might pay off to reduce fees in order to retain existing investors. It may also pay off to reduce fees before the competition in order to capture what’s left of the early mover or first mover advantage for new investors.

Most ETFs charge management fees. There are very few funds that do not.

For example, the Cambria Global Asset Allocation ETF, listed as GAA, which is run by Cambria Investment Management charges a management fee of zero. However, some individual funds within the larger GAA ETF charge a fee of 0.25%. Deborah Fuhr, partner in the ETFGI London research firm, alluded that there are already at least 2 ETFs with zero total expenses in Europe already. While some would be happy and content with zero management fee in the case of the Cambria or zero net expenses in the case of 2 European ETFs, others are wanting to push the envelope even further.

Mebane Faber, the manager of Cambria, further highlighted the competitive nature of the ETF industry by saying that, “Will someone leapfrog us and go to negative management fees? I’d love to see it. There’s a lot of room to wring out the excess fees in the fund industry.”

Others ponder if the market makers in the ETF industry, such as BlackRock and Vanguard, will eventually start paying investors and advisors to invest in their funds. Therefore, we will go from a business model that charges fees to one that pays investors in order to get their business. This new business model is plausible, especially for large investors, who routinely park large sums of capital in the vaults of ETF and ETP service providers.

It is definitely an exciting time for investors in the ETF investment space as we watch the ETF industry evolve.


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