The solution for firms is to simply try and grow their funds as large as possible, according to Peltoma Capital Partners founder and chief investment officer Rubin Miller. Take BlackRock Inc. and Vanguard Group, the two largest ETF issuers. They charge an average of 30 basis points and 9 basis points, respectively, across their US lineups, with nearly $4.5 trillion of assets between them. Their funds subsequently generate billions of dollars from fees each year.
“You’re going to charge your expense ratios on a higher asset base, but you’ve got to get really big to lower expense ratios and you need pretty accommodating markets,” said Miller, who worked at Dimensional before founding his advisory business. “The hope is that markets go up and you keep reducing your fees, and maybe make more profits.”
Dimensional has been forced to accept that low-cost reality. Their stable of actively managed ETFs, which typically command higher fees than passive products, charge less than 25 basis points on average, Bloomberg data show. Shortly before their debut, Dimensional slashed expense ratios on nearly a third of its mutual funds to bring them in line with the planned ETFs.
Additionally, Dimensional’s mutual funds — which, along with separately managed accounts, represent the bulk of the firm’s more than $600 billion in assets — are priced at the institutional-share class level, which typically carry the lowest costs among share classes for the structure, according to O’Reilly.
“We wanted to make it straightforward for financial professionals to choose which wrappers work better for them and not have fees be the driver of that decision,” O’Reilly said.
All the same, the gravitational pull of ETFs is proving hard to resist for investors of all stripes. While mutual funds have the power of incumbency in the US retirement system and 401(k)s, generational shifts are set to benefit ETFs in the years ahead.
An annual survey by Schwab Asset Management released last month found that among 2,200 investors, 89% of millennials say ETFs are their investment vehicle of choice compared to 78% of Generation X and 67% of baby boomers. Ease of trading, followed by low costs and tax efficiency, were the top cited reasons.
“If you think about where are the net inflows coming into asset management and ETFs, it tends to be younger people,” said Deborah Fuhr, co-founder of ETFGI. “And when you think about the transfer of wealth, I think they’ll continue to look at ETFs.”
This artiicle was provided by Bloomberg News.