What's Causing the ETF Price War?

A recent report by The Financial Times suggests that the price war among exchange-traded funds (ETFs) is both continuing to intensify and spreading across the industry. BlackRock, Inc. (BLK) has recently reduced costs associated with about $50 billion worth of its ETFs, and investors have poured assets into the cheapest options in the field. The rapid growth of the industry and this tendency among investors has driven the costs associated with investing in ETFs downward in what has appeared to be a race to the bottom. What are the latest developments in the ETF price war, and why has it continued to plague the industry?

Major ETF providers like BlackRock and others have repeatedly cut prices on their funds for customers. Many of the largest players have enjoyed a virtuous cycle in which, by cutting fees, they have drawn in additional customer interest and assets. The largest funds are the ones most likely to see the biggest inflows, and because they have the most liquid shares, they are able to pass along economies of scale to their clients. On the other side of the battle, though, smaller ETF providers may not have the luxury of trimming costs, and this can catch up with them.

Director of ETF and mutual fund research at CFRA Todd Rosenbluth describes the situation as "an ongoing price battle," adding that "some of these products are essentially free today." (For more, see: How ETF Fees Work.)

According to research by the Investment Company Institute, the average asset-weighted expense ratio of U.S. equity ETFs has dropped by a full 10 basis points (bps) in the past decade. By the end of 2017, the average expense ratio had hit a record low of 21 bps. Mutual funds have also been cutting costs for investors, but they have failed to keep pace with ETFs – the average mutual fund costs twice as much as the average ETF at this point. (See also: Why Are ETF Fees Lower Than Mutual Funds?)

Some of the biggest providers in the industry have set the pace for these cost declines. BlackRock's decision earlier this month to cut prices on 11 of its ETFs saw some fees dropped by as much as 70%. VanEck, another ETF provider, made a similar move with regard to its $4.6 billion emerging market bond ETF, cutting costs by one-third and dropping the expense ratio to 30 bps. 

Customers must consider a number of factors when investing in ETFs as short-term vehicles, with cost being only one consideration. State Street's SPDR S&P 500 ETF Trust (SPY), the largest ETF in the world, has kept an expense ratio of 9.5 bps, which is much higher than many of its smaller, less liquid competitors.

Nonetheless, cheapness of investment is a crucial consideration for many potential clients. Vanguard and BlackRock have seen their versions of State Street's popular ETF gain in prominence, likely for this reason. Perhaps this is the primary reason why the price wars have continued to ratchet up in recent months – with investors clamoring to place assets in the cheapest ETFs available and many of the largest providers standing to benefit more from the additional customer attention than from keeping costs higher, it only makes sense for those providers that are able to stomach the cuts to trim fees as low as possible.

The price war has been most intense in the big developed equity markets, but as of late, it has broadened across many other areas. GraniteShares has provided a smaller gold ETF, the GraniteShares Gold Trust (BAR), as of 2017, offering an expense ratio of 20 bps, and this month, that fund's assets under management (AUM) jumped by 10 times. At the same time, State Street's SPDR Gold Shares (GLD), the largest gold ETF, with a cost of 40 bps, has fallen by almost $3 billion from its high point earlier this year. (For additional reading, check out: Fee War Makes Its Way to Gold ETFs.)