Related topics: ETF, Vanguard, gold, mutual funds, Fidelity
A price war is slashing expenses to the bone on index-tracking exchange-traded funds and mutual funds. And that suits Harold Evensky fine.
"It's great," said the Coral Gables, Fla., financial adviser, who makes those funds a mainstay in his portfolios. "My clients get the benefit."
For a long time, traditional index funds were the vehicle of choice for cost-conscious investors, but now the ETF marketplace holds the lowest fees and most intense cost competition. Industry giants including Vanguard Group, BlackRock (BLK, news), Charles Schwab (SCHW, news) and State Street (STT, news), are locked in a race to see who can cut expenses the fastest, vying for penny-pinching investors who have become increasingly sensitive to costs after years of subpar results.
And the fight is still in the early rounds. Further cuts are likely among popular broad-market ETFs and funds, as well as on products in niches such as emerging markets and industry sectors.
Take Vanguard, which has been aggressively cutting fees. Some of its ETFs are likely to get even cheaper in the near future, said Joel Dickson, a senior investment strategist at the company. One possible candidate for a cut, he said, is the popular Vanguard Emerging Markets ETF (VWO).
"Given that asset returns have grown faster than costs, I would expect some further downward pressure on expenses," he said.
On the surface at least, the battle is over basis points, or "bips" in industry jargon -- tiny slivers of a fund's expense ratio, each equal to 1/100th of 1% of fund assets a year. It may not seem like much, but in this market every bit helps.
"Every basis point counts," said Evensky. "In a low-return environment, fees can have a huge impact."
So, for ETF and mutual-fund providers, slashing points is a way to gather assets, build market share and retain customers.
In October, Vanguard cut fees for investors in many of its index mutual funds by dropping the minimum investment required to buy its reduced-fee Admiral class of shares. On broad stock-market index funds, that minimum dropped to $10,000 from $100,000 -- and Vanguard automatically shifted qualifying investors to the cheaper shares.
How much did investors end up saving? Qualifying Vanguard 500 Index Investor (VFINX, news) investors, for instance, saw expenses fall to 7 basis points, or 7 cents on every $100 invested, from 18 basis points in their previous Investor-class shares.
The ETF version of Vanguard 500, Vanguard S&P 500 ETF (VOO), charges even less: 6 basis points. The nearest-priced ETFs that also track the Standard & Poor's 500 Index ($INX) -- BlackRock's iShares S&P 500 Index (IVV) and SPDR S&P 500 (SPY, news) from State Street Global Advisors, a unit of State Street -- each run 9 basis points.
Schwab, meanwhile, cut fees on six of its most popular ETFs last year in a direct challenge to Vanguard. Schwab U.S. Broad Market ETF (SCHB) now charges 6 basis points. Its closest-priced rival is Vanguard Total Stock Market ETF (VTI), at 7 basis points.
"We are very competitively priced," said Tamara Bohlig, a Schwab vice president who oversees the company's ETF business.
Those threadbare fees amount to real money for investors, especially when compared with the average 1.38% expense ratio of actively managed diversified U.S. stock funds and the 0.62% average cost of all diversified U.S. stock index funds, as reported by investment researcher Morningstar.
