There’s a whiff of desperation among asset managers in their seemingly never-ending war on fund fees.
Last week, one ETF upstart created a minor splash by doing what was once unthinkable — offering to pay investors to buy into its exchange-traded fund.
That comes on the heels of eight fund providers — including JPMorgan Chase, Vanguard and BlackRock to name a few — all slashing fees in one of the industry’s most aggressive rounds of price cuts to date.
All told, it’s never been cheaper to invest in ETFs. But for some, it’s a sign all is not well for the passive-investing boom as average fees fall toward zero.
“It could actually backfire” for asset managers, says Eric Balchunas, an analyst at Bloomberg Intelligence.
After exploding into a $7 trillion industry, index funds are facing slower asset growth and declining fee revenue. Profit margins have come down and even the biggest firms have eliminated workers, reducing costs.
Shares of publicly traded fund managers are well off their highs a year ago, even after rebounding in recent months. And questions about whether we’ve reached “peak passive” are starting to grow.
The price war “just shows you the intense competition, because you need a lot of assets to make it work,” says Susanne Alexandor, client portfolio manager at Cougar Global Investments, which oversees more than $1.2 billion.
The sub-zero fee giveaway by Salt Financial, which previously ran a single $11 million ETF, is widely seen as a marketing gimmick to drum up a little PR, get customers in the door and increase its assets under management.
During the first year, investors will receive 50 cents for every $1,000 in a new low-volatility stock ETF — until it grows to $100 million. After a year, a management fee of 0.29 percent, or $2.90 per $1,000, could kick in.
The race to zero, however, is very real. Fidelity Investments jump-started the no-fee push in August by offering index funds for free. In February, SoFi said it would waive charges on two planned ETFs for the first year.
Last week, JPMorgan started selling America’s cheapest-ever ETF for the princely sum of 20 cents for every $1,000 invested. And BlackRock unveiled plans Wednesday to cut fees for large clients in one of its S&P 500 indexed mutual funds.
And as the competition for investor money intensifies, the question is how much lower can asset managers afford to go, and should they?
“If the organic growth is going to stuff that makes no money, that’s where you see those margins coming down,” says Balchunas. “That’s what really scares” shareholders of these fund-management firms.
Price of Success