Price Wars: ETF Edition

Taco Bell and McDonald’s aren’t the only companies chasing the dollar menu audience. The major financial institutions are in a price war, cutting their ETF expense ratios in a back-and-forth which has led to the steepest decline in fees since the online brokerage was invented during the first dot-com boom.

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These are the three forces driving the ETF price war:

1. The Walmart Effect

vanguard-effect

The three largest ETF issuers (State Street, BlackRock, and Vanguard,) control a staggering 84% of the $3 Trillion dollar market. Vanguard has used a client-owned corporate structure, paired with massive scale, to cut fees and grow assets for decades. However, it has traditionally focused on core ETF offerings that track indices, rather than sector-oriented products like Cybersecurity ETFs.

Recently, Vanguard has started expanding into more sector-oriented products, like international dividend or country-specific ETFs. These types of investments were previously dominated by smaller funds with higher expense ratios. However, as a recent Bloomberg article revealed, Vanguard’s entry has put downward pressure on smaller issuers’ prices, like Walmart opening up next to a mom-and-pop store.

2. Explosive Asset Growth

In the last three years, ETFs have seen record-high inflows as more investors shy away from high-fee and actively-managed products. Today, ETF assets under management stand at $3 trillion, a 430% increase since 2006, and this growth is only expected to continue. In fact, the market is expected to reach $10 trillion in assets by 2020.

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At the same time, mutual funds have seen massive outflows as investors opt-out of their high fees and tax inefficiencies. While the ETF AUM has grown 430% since 2006, mutual fund assets have only grown by about 50%, and are expected to stop growing this year.

The expanding industry has issuers rushing to cut fees in hope of soaking up as much ETF market share as possible during this phase of rapid growth.

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