Week in Review - October 10, 2023
Too Cheap to Make Money
Welcome to this week's News Brief.
The ETF fee race may be going too far. Up to half of U.S.-listed ETFs charge too little to cover their operational expenses, according to Citigroup. The typical ETF has between $200,000 and $350,000 in fixed annual costs, plus up to 7.5 basis points in variable costs.
Most investors tend to plunk their money into ETFs that charge low fees. For example, the best-selling ETF so far this year is the $326.5 billion Vanguard 500 Index Fund, according to Morningstar Direct. The ETF charges investors 3 bps, a filing shows.
Products that cost 50 bps or more represented 30% of all ETF revenue – even though such funds account for just 8% of all ETF assets, according to a Bloomberg Intelligence analysis. But many sponsors of pricier ETFs have a hard time selling their products. Asymmetric ETFs, for example, disclosed last week that it will shut down its entire product line – three funds with a combined $18 million in assets. The funds charge between 75 bps and 95 bps, filings show.
"A decision to close an ETF product line can be made based on a number of factors, likely focusing on whether continuing to offer the exposures is feasible and economically beneficial," one researcher told Ignites.
Goldman Sachs recently launched an accelerator, which is designed to help wannabe ETF sponsors enter the space, lowering cost barriers to breaking into the market (and therefore the fees managers need to charge investors), the company said. The platform offers regulatory oversight, portfolio implementation, custody administration and capital markets service. Brandes Investment Partners last week rolled out the first three ETFs on the platform, and products from GMO and Eagle Capital Management are in the queue.
Chart of the Week Fund companies want pricing innovation, the Investment Company Institute's chief suggested recently. Some shops have asked the Securities and Exchange Commission for permission to charge different fees for different investors in the same share class, he said.
This type of pricing structure could help mutual funds compete with products such as collective investment trusts and separately managed accounts, which often have asset-based or negotiable prices. However, some lawyers question whether different prices within the same share class are necessary, given that many mutual funds already offer multiple share classes.
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