Three exchange traded fund (ETF) sponsors – State Street, Vanguard, and BlackRock – control more than 80% of the massive ETF market. Each can claim advantages. State Street has the two biggest ETFs: SPY and GLD. BlackRock was first to market, and has the largest market share. Vanguard has the lowest costs.
All three aspire to a larger market share, and much of the competition comes down to a price war on fees.
Clash of the titans
With more than $1.2 trillion invested in 1258 ETFs (both of these figures have doubled in the last 5 years), competition is fierce in the ETF market. Managers are scurrying to create new funds that track different asset classes, advertising liberally, and seeking to attract more investors by reducing management costs.
As we have discussed many times, low fees directly benefit investors. Every penny not spent by managers is another penny that can grow in value for shareholders. Vanguard is the consensus champ in the fee arena, averaging 17 basis points across all its ETFs, with many at 10 basis points or less. Just this week it announced it would track different indexes to reduce costs further.
State Street is cost-conscious too. Its SPY fund charged what seemed like a miraculous 20 basis points at its inception in 1993. Now, it’s less than half that at 9. The lowest expense ETF is Schwab’s U.S. Large-Cap ETF (SCHX), at 4 basis points. At that level, expenses might as well be zero. It’s all good news for individual investors who keep what sponsors don’t charge.
BlackRock, which has lost a couple points of market share, understands the writing on the wall – reduce fees or lose more share. It’s trimming fees and so is Schwab.
Cut costs anywhere and everywhere
Cost control is one of the most powerful tools available to investors. ETF issuers understand this. Schwab CEO Walt Bettinger was recently quoted in a press release: “In this period of uncertainty in the markets, the expenses investors pay are the only sure thing. As a long-time advocate for investors, we want to offer our clients a truly low-cost way to build a diversified portfolio.”
Based on recent industry activity, there is every reason to believe investors will get more chances to use cost leverage – to their own advantage.
For instance, Vanguard continues to take aim at successful existing ETFs. On October 10th, Vanguard is expected to debut its 1-5 TIPS bond ETF, at half the management cost of BlackRock’s and Pimco’s. Investors can vote with their dollars soon thereafter.[For a very detailed report on the ETF market, we suggest this link from State Street.]