You Might Be Paying Too Much for That Index Fund Push toward zero-cost ETFs nears the finish line By Jack Pitcher Sept. 17, 2023 11:00 pm ET Invesco has launched a lower-cost version of its flagship QQQ ETF that tracks the Nasdaq-100 Index. PHOTO: MICHAEL NAGLE/BLOOMBERG NEWS Index-tracking funds are inching closer to free. State Street STT -0.75%decrease; last month slashed the fee on its cheapest S&P 500 exchange-traded fund, known by ticker symbol SPLG, to 0.02%—making it less than a quarter of the cost of its popular SPY fund that tracks the same stocks. It is now the cheapest index fund in its class. A $1,000 investment in SPLG costs investors just 20 cents a year in fees. The arrival of a 0.02% fund fee—about as close to zero as many in the market expect major funds to get—is the culmination of a decadeslong fee war among asset managers. “It is hell for issuers, but heaven for investors,” said Eric Balchunas, senior ETF analyst at Bloomberg Intelligence. An individual investor can now build a fully balanced portfolio using ETFs without paying more than 0.05% in total fees, said Susan Thompson, head of SPDR Americas distribution at State Street, compared with around a 1% average fee 20 years ago. “I think we’re getting pretty close to the end. If someone goes to zero, then they’re doing it as a loss leader,” Thompson said. Fees make a huge difference over a long time horizon: A $1 million account invested for 40 years would save about $370,000 in fees at a 0.05% fee versus a 1% fee, according to a State Street analysis. The average ETF fee is 0.55%, but the asset-weighted average, which takes into account how much money is invested in what funds, is just 0.17%, according to Bloomberg. The New York Stock Exchange floor. The cheapest funds have gathered the most money in recent years. PHOTO: MICHAEL NAGLE/ZUMA PRESS State Street’s SPLG fund is part of its suite of ETFs marketed to individual investors, which includes passive funds tracking stock and bond indexes. The funds have lower fees than some of the asset manager’s better-known, bigger offerings, and lower share prices to make them easier to buy incrementally. Invesco IVZ 0.39%increase; has similarly launched a lower-cost version of its flagship QQQ ETF that tracks the Nasdaq-100 Index. The fund, QQQM, charges a 0.15% fee, compared with 0.2% for QQQ. Both State Street and Invesco are able to offer lower-cost versions of their most popular funds because there are professional traders that need the liquidity provided by the bigger funds to transact in large sizes. The cheapest funds have gathered the most money in recent years. When State Street cut the fee on its SPDR Portfolio High Yield Bond ETF to 0.05% from 0.1% on Aug. 1, it immediately saw a record-setting inflow of $611 million over the course of the month. SHARE YOUR THOUGHTS Are you re-evaluating your index funds to take advantage of lower fees? Join the conversation below. Financial advisers moving largely from a commission-based model to a fiduciary, fee-based model has helped drive quick adoption of the lowest-fee funds. Advisers are motivated to put their clients in the cheapest funds possible. While there has been a long move toward passive investing from actively managed mutual funds from cost-conscious investors, lower fees in the active space are helping drive more interest there as well. Actively managed ETFs, which made up just 4% of the industry’s total assets at the beginning of this year, have grown quickly in 2023. Falling fees for active management are likely one of the biggest growth drivers. A recent FactSet analysis showed that ETF fee compression slowed significantly in the first half of 2023, with average fees dropping at one-fifth the pace of fee cuts over the previous five years. Investors’ embrace of comparatively more expensive active funds is one of the reasons for the slowdown, said Elisabeth Kashner, FactSet’s director of global funds research. This year’s most popular active fund, the JPMorgan Equity Premium Income ETF, charges a 0.35% fee, below the 0.68% average for active funds. Dimensional Fund Advisors launched an actively managed California municipal bond ETF in June at a 0.19% fee, even cheaper than passive funds in the same category. “Active finally got with the program and got low cost,” Balchunas of Bloomberg Intelligence said. “You’re seeing more funds under 0.4%, 0.3%, and it’s no mystery that’s why active is taking off. Once you get down to that dirt-cheap line, the flows come.”
The Fixed Income space seems to have a lot of actively managed ETFs. I own several leveraged loan, floating rate loan & CLO ETFs and the fee is all over the place, however the ETFs that are passively managed are significantly cheaper. The performance so far seems to be better for the actively managed ones. I think recently there has been an index created for the AAA rated CLO tranches, but their is no index for the BBB and lower rated CLO tranches. I don't think is an index for Leveraged Loans either so the fee is like 50-80bps.