ETF flows chasing fee cuts, reports FactSet

Nov 17th, 2017 | By | Category: ETF and Index News

ETF flows have started to chase the fund fee cuts that have become a staple of the industry in recent months, according to new research released by FactSet.

ETF flows chasing fee cuts, reports FactSet

FactSet believes that some products from Vanguard, famous for low fees, now look expensive compared to peers.

The report comes in the wake of numerous announcements in the last few months of fee reductions and new ultra-low-cost funds from major players, including Charles Schwab, State Street Global Advisors, Franklin Templeton, Deutsche Asset Management, and Invesco PowerShares.

The report states October saw an escalation of the price war over headline vanilla ETFs as well as price compression in the strategies that had once promised greater pricing power, such as smart beta and actively managed products.

The chart below shows how the US equity ETF landscape has changed in October. FactSet notes that Vanguard and iShares now look overpriced in the 1000/2000/3000 space.

ETF flows chasing fee cuts, reports FactSet

Source: FactSet.

FactSet reports that flows have already started to follow the fee reductions in the large-cap space. The iShares Russell 1000 ETF (IWB US) lost $600 million in October, while the Vanguard Russell 1000 ETF (VONE US) lost $5.6m. Meanwhile, the SPDR Portfolio Large Cap ETF (SPLG US) and the Schwab 1000 Index ETF (SCHK US) took in $18m and $103m respectively.

This pattern was repeated across the US ETF industry, where FactSet believes an expense ratio of 0.20% is now expensive for vanilla US equity ETFs. The firm reports funds that gained market share in October cost on average 0.15%, while those that lost market share cost 0.19% on average, both on an asset-weighted basis. In the vanilla fixed income space, market share gainers cost 0.17%, while the losers cost 0.28%.

In the non-vanilla strategy space, where fees are still higher, costs are coming down as market share flows from expensive funds to cheap funds. For the 14 non-vanilla strategies that saw net inflows of more than $50m in October, the median fee of market share gainers was 0.075% lower than the median fee of market share losers.

ETF flows chasing fee cuts, reports FactSet

Source: FactSet.

Turning to active ETFs, FactSet reports that fund flows are generally following lower fees, although the effect is not uniform. Funds that give investors something unique are still able to charge a premium and not lose market share. However, where funds compete within the same segment, investors are migrating to the cheaper options.

The story is even repeated for the smart beta funds that many providers hoped might be protected from fee competition. FactSet uses the US high dividend segment as an example. The Schwab US Dividend Equity ETF (SCHD US) (0.07%) and the Vanguard high Dividend Yield Index Funds (VYM US) (0.08%) saw inflows of $115m and $181m in October. Compare this to the iShares Select Dividend ETF (DVY US) (0.39%) and the WisdomTree US High Dividend Fund (DHS US) (0.38%), which saw outflows of $147m and $25m respectively.

The report concludes by saying that although ETF providers might think the market share gains seen by unique funds give them some optimism for charging premium fees in certain segments, October’s asset migration from expensive to cheap funds suggests pricing power will be short-lived, as competition will likely come to challenge any successful fund.

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