Just two days after BlackRock slashed fees on its iShares Core ETFs, Schwab trimmed fees on a handful of its index ETFs, heating up the competition in the already low-cost ETF arena.
Paul Ellenbogen, head of global regulatory solutions at Morningstar, said the latest moves “could be the beginning of a price war,” which was likely sparked by the DOL fiduciary rule that take effect in early April 2017.
“In my opinion, the DOL [rule] does diminish the value of many of the mechanisms fund companies have used for gaining distribution, including 12b-1 fees, wholesaling, and revenue sharing,” said Ellenbogen. “Combine that with the trend toward passive management, and I could see how fund companies would start to behave like tech companies: gain market share now, take profits later.”
Salim Rami, who heads BlackRock’s U.S. Wealth Advisory business, also referenced the DOL rule in the press release accompanying the ETF price cuts.
“This is another critical milestone to help advisors as they prepare for the major shift the DOL fiduciary rule requires—providing investors with quality index exposures at great value in the center of their portfolios,” said Rami.
Schwab didn’t mention the DOL rule in its announcement, but when asked if that was a consideration in the decision to cut fees and if more cuts could follow, a spokeswoman told ThinkAdvisor that “as fee awareness and fiduciary expectations rise in a post-DOL world, we know that downward pressure on costs will continue. …We have always been a price leader, and will continue to strive to deliver as low cost solutions as possible for our clients.”
This week’s moves by Schwab and BlackRock continue a trend of lower cost investing, exemplified by the rising popularity of index ETFs at the expense of more expensive actively managed mutual funds, that predates the DOL rule.
According to data from Morningstar, passive funds saw inflows of $418.6 billion last year, while active funds saw outflows of $223.1 billion, and that trend has continued into 2016.
For example, year-to-date $260 billion has flowed out of U.S, long-only equity mutual funds, while $74 billion has flowed into U.S. equity ETFs, according to Bank of America Merrill Lynch.