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Portfolio > ETFs

Has Fiduciary Rule Sparked Price War Among ETF Providers?

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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.

In announcing its ETF fee cuts, Marie Chandoha, president and CEO of CSIM (Charles Schwab Investment Management), said as much, noting “the appeal of index investing continues to accelerate. When individuals invest their hard-earned money, they are increasingly searching for low-cost, transparent, enduring products.”

Schwab cut fees one basis point on five ETFs: small-cap, mid-cap, international equity, emerging markets equity and U.S. aggregate bonds. The new expense ratios now range between 0.04% (for the bond ETF) to 0.013% for the emerging market equity ETF.

BlackRock reduced fees on 15 iShares Core ETFs by a few basis points. Fees on those ETFs now range from a low of 0.04% (for the iShares Core S&P 500) to 0.16% (for the iShares Core MSCI Emerging Markets ETF). Both Schwab and BlackRock ETFs are now priced very competitively with Vanguard’s ETFs, whose fees range from 0.5% to 0.09%.

Todd Rosenbluth, director of ETF & Mutual Fund Research at CFRA, an independent equity research firm, expects “asset managers will continue to bring costs down to appeal to investors both ahead of the DOL implementation and as more investors seek out passive strategies.” Moreover, said Rosenbluth, “New Department of Labor rules make choosing an expensive fund problematic for an advisor.”

Ellenbogen expects advisors will be choosing from a “narrower product shelf” of funds, spending more time on financial planning, tax planning and other more customized services for clients than on choosing funds, “paying more close attention to cost at every level.”

In keeping with that approach, Merrill Lynch announced Thursday that beginning in April it will no longer offer commission-based, brokerage IRA accounts. Clients will have the choice of moving to a fee-based account with an advisor or to a self-directed brokerage acount or cheaper fee-based option or a robo-advisor product, which will soon be available through Merrill Edge platform.

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