A lot goes into picking an investment fund for your retirement savings, and one of the most important things to consider is how much it costs. Recently, asset managers like BlackRock, Charles Schwab, and Vanguard have been locked in a price-lowering competition, slashing fees on their funds and ETFs by an impressive margin. Some are spiraling shockingly close to zero.
It’s essentially a high stakes-game of chicken that ends squarely in the customer’s favor.
In November, Blackrock dropped the cost of its popular iShares ETF under Vanguard’s Total Stock Market ETF, becoming the cheapest available option. According to the Wall Street Journal, Schwab had matched the price cuts by the end of the day to 0.03%, Vanguard lowered its offering soon after, and Goldman Sachs’ asset-management division launched an ETF with a 0.09% fee—which apparently was enough to trigger a series of executive gasps.
Needless to say, this is extremely cheap—just 3 cents per $100 invested, for Blackrock and Schwab. Five years ago, Morningstar pegged the asset-weighted expense ratio across all funds at 0.76%. Now it’s 0.64%.
These days, common sense favors low-cost investing, and investors are putting their money where their mouthes are. Around 95% of all new money has gone into the cheapest fifth of the fund market, according to a 2015 study by Morningstar. In the ’90s, that number was 56%. Loads, or commissions, have also fallen out of favor significantly, and most importantly, actively managed funds are taking huge hits. Last year, $147 billion was withdrawn from active funds and higher-cost funds, and $365 billion was put into passive index funds and ETFs, according to Bloomberg.
A great deal of this trend is explained by the fact that passive fund management seems to generate better returns for less cost to the investor. In the past decade only 21% of managers beat the indexes they’re measured against. Why would anyone want to pay more for less return, especially since a small fee difference of 0.60% means an almost $100,000 loss over 30 years, from a $100,000 initial nest egg.
As it stands now, per Morningstar, active funds currently have $3.8 trillion under management, and the passive have $2.5 trillion. For large-cap funds, passive funds account for just a third. But if a fiduciary rule is passed, the paradigm shift would be evident, accelerating the existing trend and probably infuse $1 trillion into passive funds.
This might sound bleak for the industry, but it’s a volume industry and volume is good. In 2014, the industry saw fee revenue hit a high-water mark of $88 billion, over $38 billion more than it was the previous decade, buoyed by a 143% increase of assets under its management, according to Morningstar. As its report aptly says, “Thus, the industry—rather than fund shareholders—has benefitted most.”
Besides the volume, another reason funds can be so cheap, the Journal notes, is because these super-cheap ETFs and funds are like loss-leaders, coaxing investors into the building where they can then be enticed into taking the stairs up from 0.03% to the investing champagne room that has more luxe investment options that offer niche exposure.
If that actually turns out to be the money-making tactic for asset managers, one big question comes to the fore: Will we see a 0.00% ETF?