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ETF News And Commentary

Thanks to the growing competition in the ETF business in recent years, there has been a race to the bottom with regard to costs in order to gain market share.  While many issuers have joined this bandwagon, the low cost corner of the market is dominated by Charles Schwab and Vanguard.

Initially, Vanguard was the ruler of low cost products. But, lately Schwab seems to have surpassed Vanguard by cutting its fees to rock bottom levels. Probably, in a bid to regain its lost ground, Vanguard also resorted to a price cut strategy lately.

Recently, this mega ETF issuer announced that expense ratios have fallen for five of its international stock ETFs, including FTSE Emerging Markets (VWO - ETF report) – the most popular emerging market ETF. This is not the first time that Vanguard slashed its already low expense ratio to a new level. In December 2012, the issuer reduced fees on almost two dozen ETFs (read: Vanguard Ends 2012 with a Bang, Cuts Fees on 22 ETFs).  
The following are the ETFs that saw a cut in fees:

ETF Symbol AUM Old Expense Ratio New Expense Ratio How Cheaper?
FTSE All-World ex-US Small-Cap (VSS - ETF report) $1.81 billion 0.25% 0.20% 87% lower than the average fees charged by peers with similar holdings.
FTSE Emerging Markets (VWO - ETF report) $41.1 billion 0.18% 0.15% 91% lower than the average fees charged by peers with similar holdings.
Global ex-U.S. Real Estate (VNQI - ETF report) $1.26 billion 0.32% 0.27% 80% lower than the average fees charged by peers with similar holdings.
Total International Stock (VXUS - ETF report) $2.54 billion 0.16% 0.14% 89% lower than the average fees charged by peers with similar holdings.
Total World Stock (VT - ETF report) $3.29 billion 0.19% 0.18% 87% lower than the average fees charged by peers with similar holdings.

VWO's Fee Cut in Detail

Among the set of five funds, the most-talked about is VWO. It is the largest emerging market ETF followed by iShares MSCI Emerging Markets Index Fund (EEM - ETF report) that charges 67 bps in fees. Such a huge expense ratio differential is deemed to be the reason behind iShares EEM’s failure to keep the top spot in the space.

So far, VWO used to face tough competition, on the expense front, from Core MSCI Emerging Markets ETF (IEMG) charging 18 bps in fees and most importantly arch rival Schwab’s Emerging Markets Equity ETF (SCHE) charging 15 bps annually. But with the latest cut to 15 bps, Vanguard left iShares’ IEMG behind and matched Schwab’s SCHE.

VSS’s Fee Cut in Detail

With a 5 bps cut in fees to 20 bps annually, VSS also matches the lowest expense ratio along with Charles Schwab’s International Small-Cap Equity ETF (SCHC) in the foreign small & mid cap equities ETF space.  In terms of AUM, VSS ranks second in the space following iShares MSCI EAFE Small Cap Index Fund (SCZ) which charges 40 bps. This latest cut might help VSS compete for some more investors’ assets.

VNQI’s Fee Cut in Detail

VNQI has also seen a 5 bps cut in fees. Previously, VNQI was the cheapest ETF option in the global real estate ETF space, though the recent cut makes VNQI an even cheaper option. VNQI comes second in terms of AUM in the space trailing SPDR Dow Jones International Real Estate ETF (RWX) that charges about 59 bps.

VT & VXUS’s Fee Cuts in Detail

The duo operates in the global equities space securing third and fourth places in terms of AUM. Either way, the space is dominated by Vanguard in terms of AUM as well as having the cheap choices too. Vanguard’s fund FTSE All World Ex US ETF (VEU) tops the list (read: 3 Ultra Cheap ETFs for Value Investors).

Bottom Line

Cost is a crucial factor in choosing funds for a portfolio, in particular when two funds track similar, or even identical, indexes. Generally, the low-cost product goes past the high-cost product and leads in AUM making cost essentially the only big difference between the two funds (read: Inside Fidelity's New Low Cost Sector ETF Lineup).

We think Vanguard is striving to gain some market share by promoting its core strength – ‘low cost’ tag – in some highly crowded categories. In fact, Vanguard started to lose its title of the cheapest ETF provider to Charles Schwab in recent times. Meanwhile, iShares – not even known as a low cost provider – jumped on this low cost trend and took part in this price war (read: iShares Cuts Fees on Six ETFs, Debuts Four Low Cost Funds).

In such a scenario, how could Vanguard sit still? Whatever the cause, investors would like to see an effect on the AUMs of the aforementioned Vanguard funds with lower costs and closely follow the asset flow following these fee cuts.

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