Earlier this week, BlackRock, the world’s largest money manager, announced fees cut on 15 iShares core ETFs across US equity, fixed income and international equity asset classes. The expense on the iShares Core S&P 500 ETF (IVV - Free Report) is now just 4 basis points, making it cheaper than the other two ultra-popular ETFs tracking the same index—SPDR S&P 500 ETF (SPY - Free Report) and Vanguard S&P 500 ETF (VOO - Free Report) .
The move came ahead of the implementation of the Labor Department’s new fiduciary rule, which will require financial advisors to work in the “best interest”of their clients when selling retirement products. These rules, set to be implemented in April next year, will make it difficult for advisors to recommend actively managed mutual funds to retirees. (Read: Top Ranked Sector ETFs and Stocks for Q4)
Not only most of the actively managed funds are much more expensive than passively managed broad market ETFs, they have also underperformed passively managed funds for the past many years. It is expected that the rule could push as much as $1 trillion into passive managed products. Low cost ETFs tracking broad market indexes will be the biggest beneficiary of this move. (Read: 4 Best ETFs for Q4)
“Institutions, individuals, and financial advisors are increasingly putting low-cost ETFs at the center of their long-term investments. Now, with the Department of Labor (DoL) fiduciary rule coming into force, financial advisors are sharpening their focus on the quality and cost-efficiency of funds. BlackRock expects these advisors will use ETFs more and more as active tools and alongside high-conviction active funds to build better portfolios for clients. We also expect financial advisors will increasingly turn to core ETFs for long-term holdings, where value matters most", per BlackRock press release.
The price war between large ETF providers has escalated of late. Vanguard, which is the low cost leader in the ETF industry, saw largest inflows between January and August this year. They attracted $55.9 billion in net new inflows in the US, while BlackRock’s iShares gathered $53.9 billion and State Street Global Advisors had only $16.6 billion in inflows, per FT.
This morning Charles Schwab announced expense ratio cut for five of their popular ETFs. I would not be surprised to see similar moves by other major ETF providers as the competition for attracting price-sensitive customer inflows intensifies. And, there is no doubt that investors are the biggest winners in this fee war.
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