When people talk ETF fee wars, they tend to talk about Schwab, Vanguard and iShares battling it out over who has the lowest-cost emerging markets ETF.
This mattered a lot a few years ago, when providers were charging crazy-high prices for simple beta exposure. But today, we’re talking pennies. When I can buy a diversified portfolio of ETFs with a blended expense ratio of 0.0865 percent per year, the battle for low-cost core exposure has reached the point of diminishing returns.
That’s not to say, however, that the ETF fee war is over. Far from it. I expect it to rage hotter than ever in 2013, as it spreads from the battle over core exposure into other areas of the market.
Here are three hot spots I’m monitoring in the year to come.
1) IAU vs. GLD
Gold is a commodity. By definition, two ETFs that hold gold bullion should deliver identical performance. Therefore, if you’re choosing a gold ETF, you should choose the one with the lowest all-in costs.
iShares was late to the gold ETF party. Its gold bullion ETF—the iShares Gold Trust (NYSEArca: IAU)—launched on Jan. 21, 2005, a little more than two months after SSgA launched the SPDR Gold Shares (NYSEArca: GLD) on Nov. 18, 2004.
The two funds charged the exact same expense ratio and do the exact same thing, holding gold bullion in a vault. But with first-mover advantage (and a friendlier ticker), GLD gathered almost all the assets. By June 30, 2010, GLD had $52.8 billion in assets, while IAU had just $3.4 billion.
But on July 2 of that year, iShares slashed the fee on IAU from 0.40 percent to 0.25 percent, undercutting GLD’s expense ratio by nearly 40 percent. Since then, IAU has dominated GLD on a net flows basis:
- IAU: $6.8 billion in net inflows
- GLD: $2.8 billion in net inflows
You have to be very careful looking at those numbers. I’m not implying a one-for-one switch here. Instead, what’s happening is that IAU and GLD are dividing the market.
With its lower expense ratio, IAU is attracting financial advisors and retail investors who care a great deal about the “all-in fee” of their portfolios.
But GLD retains an important advantage over IAU for some investors. Both products trade at an average spread of $0.01/share. But because GLD has a larger share price—one share of GLD costs $163.09, while one share of IAU costs just $16.39—GLD is cheaper to trade on a percentage basis.
That goes double for institutional investors: Unlike retail investors, who might pay $9.99 for a trade of any size, institutions often pay commissions on a “pennies-per-share” model. Fewer shares = lower commissions, making GLD even cheaper for them.
Thanks to these trading efficiencies, GLD attracts the bulk of institutional and “hot” money. At the same time, IAU’s low price clearly appeals to the advisor community and those who are buying for the long haul.
What will happen here?
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