Investing for Free: The ETF Industry is in a Race to Zero

etfsThe competition is fast and furious in the ETF industry these days, with some issuers now on the precipice of offering zero fees on passive index funds.

What makes a successful ETF is very simple: growing assets under management (AUM). The more money coming in, the more money the fund stands to make via operating expense fees, which investors know as expense ratio.

The expense ratio is a flat percentage feed the fund charges investors to manage their money. This ratio varies widely among fund types and issuers, but the clear trend is for these fees to continue to come down.

And now, some funds’ fees are getting so low that they’re approaching zero.

ETF Trends took a recent look at just how low some of these expense ratios are getting. The following three funds now boast expense ratios of only 0.03%, which is the lowest on record.

A Race to Zero? The 0.03% Expense Ratio Club

  • iShares Core S&P Total US Stock Market ETF (NYSE:ITOT)
  • Schwab U.S. Large-Cap ETF (NYSE:SCHX)
  • Schwab U.S. Broad Market ETF (NYSE:SCHB)

ETFs that simply track an index are particularly keen on bringing fees down, to make their fund more attractive than their peers’ (since their performance will be exactly the same):

“For traditional market-cap weighted index funds – the return of two funds covering the same market should be equivalent, resulting in beta being commoditized and fund managers left competing only for price,” writes Angana Jacob, Global Research & Design at S&P Dow Jones Indices, in a research note. “Thus, the entry barrier becomes the scale, and is no longer about the product. If a fund has USD 100 million AUM and the cost of replicating the market for an additional USD 100,000 is close to zero, in order to maximize profit, the eventual price target should also trend toward that point.”

The average expense ratio across the universe of 1,948 exchange traded funds is 0.58%. With trillions of dollars pouring into ETFs, there’s plenty of wiggle room for issuers to continue to bring fees down further.

That’s great news for investors, and will only help accelerate the industry’s already-formidable growth.

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