After years of being overlooked, market-cap-weighted index funds are once again the bright, shiny objects of the exchange-traded fund world.
Dubbed the "core wars" by Bloomberg News, the five largest ETF providers now offer investors extra-low-cost exposure to broad-based U.S., developed and emerging markets equities and U.S. dollar-denominated bonds.
Such offerings at low price points had been ceded to BlackRock (BLK) Inc. (BLK) and Vanguard Group Inc. by other issuers. But recent activity by State Street Global Advisors, Invesco (IVZ) PowerShares Capital Management and Charles Schwab Investment Management signaled a shift in how these exchange-traded products are being positioned — not just for retail investors but also to financial intermediaries and other institutions.
In February, Schwab passed $100 billion in total assets under management across its 22 U.S.-listed ETFs, and 27% of that money came in the past year through March 22, according to research from XTF Inc., a unit of the London Stock Exchange Group. Gaining $5.4 billion of new assets over the last year, the largest Schwab ETF is a $14.4 billion developed ex-U.S. ETF, holding large- and midcap stocks at a 0.06% expense ratio.
"Getting these products to scale has required ruthless management of cost," said Jonathan de St. Paer, head of strategy and product for Charles Schwab Investment Management in San Francisco. "Working within the greater Schwab framework, we're looking at how these exposures are used by retail investors, advisers and registered reps, 401(k) plans, as well as within automated model portfolios."
While Schwab products, including mutual funds, are offered commission-free to Schwab brokerage customers, Mr. de St. Paer says growing use outside of the Schwab ecosystem is indicated by the fact that 25% of the $31.7 billion in 2017 net flows to Schwab funds was from other platforms.
In October, SSGA introduced new tickers, significantly lower pricing and new indexes for 15 existing ETFs, rebranded as the SPDR Portfolio suite — a direct counter to iShares Core by BlackRock, first introduced in late 2012.
"Each fund in the SPDR Portfolio suite is priced equal to or below the lowest fee ETF in the category," said Rory Tobin, head of global SPDR business at SSGA, in a release.
The SPDR Portfolio relaunch coincided with inclusion on the TD Ameritrade commission-free platform, and the subsequent elimination of commission-free status for competing BlackRock and Vanguard products. And, according to an analysis by Morningstar Inc., those products added $10.9 billion in aggregate assets in just five months, compared to $3.3 billion total in the 33 months preceding.
And in September, Invesco — home to the smart-beta-heavy PowerShares ETF franchise and in the process of acquiring the ETF business of Guggenheim Investments — launched a handful of "PureBeta" ETFs with low expense ratios. Although assets have yet to arrive, Dan Draper, managing director and global head of ETFs for Invesco in Downers Grove, Ill., said the products will help as Invesco continues to partner with advisers and financial institutions on investment solutions as well as offerings through Jemstep, the Los Altos, Calif., digital advice platform provider purchased by Invesco two years ago.
"We are able to offers these six products at competitive prices, without significant incremental cost," said Mr. Draper. "And they allow us to have a more holistic asset allocation discussion with Invesco clients."
Yet, while the competition is increasing, momentum remains with BlackRock and Vanguard. The top eight ETFs for net flows over the past year (four from Vanguard, four from BlackRock) all fall within the definition of core exposure, including S&P 500 ETFs from both firms.
Among the five issuers, indexes and product suite vary in both stocks and bonds, but all are aligned with an individual or adviser-driven automated portfolio that leans on the flexibility and liquidity of ETFs to implement a low-cost investment solution.
According to XTF, 28 ETFs have expense ratios of 0.05% or less and hold total assets of $495 billion.
For larger institutions, concerns around daily liquidity are less applicable, but the messaging from the ETF marketplace is shifting some conversations. "Institutional investors are increasingly aware of their all-in costs, and achieving their exposures with the right balance of cost and execution," said Christopher Philips, head of Vanguard Institutional Advisory Services in Malvern, Pa.
In October 2012, Vanguard aligned its "best advice" for indexes with the Center for Research in Security Prices for U.S. equities and FTSE for international stocks. CRSP-based ETFs at Vanguard account for $251 billion in assets and FTSE international ETFs have $211 billion in assets.