ETF price war continues to rage


Asset management executives don't like to admit it--it's as though price competition is below them--but a price war is raging in the ETF industry.

Most people would point the finger at Vanguard, which has made terrific progress in the market, prompting competitors to fight back. BlackRock and Charles Schwab are among those who have reduced management fees in recent weeks.

"Vanguard insists it is not worried by its competitors but remains focused on cutting costs for its clients. As Vanguard is owned by the investors in its funds and has no external shareholders, it is able to pass on economies of scale by reducing charges as the assets of its funds grow."

There has also been a shift as the retail market continues to gather steam. As of now, the management fee reductions seem to play to the buy-and-hold retail crowd, while the institutional crowd by necessity considers the total cost of ownership, factoring in spreads, liquidity, internal costs, index tracking error and so forth. In any case, the market continues to expand and it now manages about $1.65 trillion.

That prompts the question of at what point the industry will manage as much as hedge funds, which remain well over $2 trillion. The parity point may not be far off, especially if the main indexes continue to fare well versus hedge funds. The movement says a lot about the current state of active management.

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