The price cuts come at a time when the ETF marketplace is booming, thanks to an increasing menu of ETFs, an increased retail presence through advisers, and increased use by institutional investors for functions such as transition management and cash equitization.
The ETF market is expected to grow 29% annually until it exceeds $1 trillion by 2010, according to Financial Research Corp., Boston.
And BGI and SSgA have a combined 85% ETF market share, according to FRC; the Bank of New York Co., which doesn't offer sector ETFs, comes in third with a 10% stake. Vanguard has a 4% share, while PowerShares Capital Management, LLC, Wheaton, Ill., has 1% of the market, FRC said.
Sector ETFs account for only a small piece of the ETF market, about $35 billion vs. more than $300 billion for all ETFs, market research shows.
Net inflows in sector iShares totaled $1.1 billion for the three months ended March 31, according to a monthly report from BGI. SSgA's Sector SPDRs took in $2.3 billion during the same time. Vanguard saw $1 billion in net sector fund inflows, while PowerShares gained $1.2 billion in sector fund assets, the report found.
Part of the appeal of ETFs is their reputation for being a cheap investment vehicle, said Dan Dolan, director of wealth management strategies for the $15.9 billion Select Sector SPDRs Trust, distributed by ALPS Distributors Inc., Long Island City, N.Y.
"The good ETFs have the ability to appeal" to both retail and institutional investors, he said. "Low expenses are an important ingredient if you're going to do that crossover,"
Expense ratios — and reasons for lowering them — can vary. The usual reason is asset growth and associated economies of scale.
However, several industry observers said BGI's latest adjustments were motivated by plans to introduce enhanced ETFs, which do not follow an index as closely as passive ETFs.
If BGI were to roll out enhanced ETFs, the firm would compete with offerings from PowerShares Capital that are priced at 60 basis points. Because enhanced strategies are typically more expensive, BGI needed to lower expense ratios for the passive strategies.
"We are very cognizant and aware of prices in the marketplace for different types of vehicles, but we don't evaluate ourselves alongside" other firms, said Bruce Bond, PowerShares president.
PowerShares has about 20 industry enhanced ETFs with $2.5 billion in assets under management as of May 11 that are comparable to the sector offerings from BGI and SSgA.