ETF fees on downward trend, finds ICI

May 26th, 2017 | By | Category: ETF and Index News

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The Investment Company Institute (ICI), an association of US investment companies, has released research showing that average US-listed ETF fees have been on a downward trend in recent years. The report also shows that as a proportion of all US assets invested, the market share of assets in ETFs has grown from 3.3% in 2005 to 27.2% at the end of 2016.

ETF fees on downward trend, finds ICI

There were 1,409 US-listed equity index ETFs at the end of 2016. Increasing competition has put pressure on fees, according to the ICI study.

The data shows that the asset-weighted average fee for equity index ETFs has fallen to 0.23%, a drop of 32 percent from the high of 0.34% in 2009. The ICI puts this down to competition and economies of scale within the ETF industry, which has put downward pressure on fees in this segment.

Bond index ETF fees are also falling, having dropped from 0.25% in 2009 to 0.20% in 2016.

The ICI reports that the market for bond ETFs is maturing. Assets in this segment have increased significantly, and the number of funds and sponsors competing for investor dollars has grown, driving down expense ratios.

Between 2005 and 2009, average expense ratios of equity ETFs rose, a situation ICI attributes to expansion into a variety of equity asset classes during this period. Previously, assets in ETFs were predominately in funds that tracked broad-based, large-cap US equity indices such as the S&P 500.

As the demand for ETFs has grown, providers have started to offer a much wider variety of equity ETFs, such as those tracking international equity or indices of narrower segments of the domestic market. From 2005 to 2009, net share issuance of sector and world equity ETFs amounted to £245 billion, 39 percent higher than net share issuance of broad-based US equity ETFs. World and sector ETFs tend to have higher expense ratios than ETFs with exposure to broad US equity.

Between 2004 and 2009, the number of equity ETFs more than quadrupled. By the end of 2016 there were 1,409 US-listed equity ETFs, and this increased competition, together with greater economies of scale, was the driver of the reduction in average fees seen since 2009, according to the report.

ETF fees on downward trend, finds ICI

Source: ICI.

Like the pattern of expense ratios for equity ETFs, the expense ratios of bond index ETFs rose initially but has been falling in recent years. The reasons are much the same. By the end of 2006, two-thirds of assets in US-listed bond ETFs were tracking US government bond indices and such funds tend to have low expense ratios.

Bond ETFs began to diversify in 2007 when the number of bond ETFs jumped from 6 to 49, and fees have been on a gradual downward trend since 2010 due to increased competition and economies of scale realised as assets have increased.

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