‘Fee war’ sticky wicket for managers of active, ESG ETFs

Relentless investor zeal for fee savings in exchange-traded funds is beginning to sow a set of new challenges for managers of actively managed and environmental, social and governance ETFs.

By the end of 2019, the asset-weighted average annual expense ratio for overall U.S.-listed ETFs was 0.2% compared to 0.23% two years earlier, according to a blog post on the website of FactSet.

ETF expense ratios for equity and fixed-income funds dropped even more: each dropped to 0.18% from 0.21% two years ago.

The three managers with the largest flows in 2019 were BlackRock (iShares), Charles Schwab and Vanguard Group, and ended the year with asset-weighted ETF expense ratios of 0.2%, 0.08% and 0.06%, respectively. According to the blog post, other ETF issuers have adapted to the low-fee environment by offering specialized products at a higher price, but competition inevitably creates more "fee wars."

The asset-weighted expense ratio among specialized equity ETFs show drops along all categories. For active ETFs, the ratio dropped to 0.8% at the end of 2019 from the previous year, and among ESG-focused ETFs, the ratio dropped even more significantly to 0.21% from 0.27%.

"ESG and active management in the equity space hosted riveting fee wars," said Elisabeth Kashner, FactSet's director of ETF research, in the blog post. "The case studies presented (in the blog post) can help issuers understand how to price new products and decide when to drop pricing on existing ones. The experience of active managers who are already competing in the ETF marketplace can be informative for those who are gearing up to launch non-transparent active ETFs."

The blog post is available on FactSet's website.