"Change often arrives in the company of mixed opinion," said Dalia Blass, director, division of investment management at the U.S. Securities and Exchange Commission, at a recently concluded Investment Company Institute conference. But when it comes to the ongoing shift to lower-cost investment vehicles, institutional investors continue to be of one mind. They are driving assets into low-cost exchange-traded funds in line with their investment objectives.
Over the past year, 98% of all ETF flows ($262 billion) went to products charging a management fee of 0.2% or lower, according to research firm XTF Inc. But perhaps even more telling for institutional investment trends in ETFs, 62% of flows over the past three years ($636 billion) went into low-cost products managed by BlackRock Inc., Vanguard Group or State Street Global Advisors and based on indexes from London Stock Exchange Group's FTSE Russell, MSCI Inc., S&P Dow Jones Indices LLC or Bloomberg LP.
"Benchmarking is essential to product choice," said Andrew McCollum, a managing director at Greenwich Associates LLC in Stamford, Conn. "And once the benchmark is set, fees are considered relative to other options."
The institutional ETF playing field, defined by index, assets and volume has split the market to the point that many issuers looking to gain an edge in the retail and adviser market are pushing fund fees as the primary metric of choice and publicity.
For example, in mid-March, J.P. Morgan Asset Management launched a U.S. large/midcap equity ETF for an initial cost of just 0.02%. Earlier this year, student loan refinancing company Social Finance Inc. revealed plans to sponsor two equity ETFs with waiver-adjusted zero expense ratios. And a recently launched fund from Salt Financial LLP is looking to include a net 5-basis-point rebate for the first $100 million in assets via an amendment awaiting SEC approval.
In her address, Ms. Blass expressed concern "about what it will mean for investors — particularly Main Street investors — if the variety and choice offered by small and midsized asset managers becomes lost in a wave of consolidation and fee compression." And she has asked her staff to start a new outreach initiative targeted at small and midsized fund sponsors.