Fee compression among exchange-traded funds is great for investors, but not so great for ETF sponsors. With a handful of funds already trading at three basis points, coupled with increased chatter about the possibility of seeing ETFs with zero fees in the near future, fee compression could remain a thing in ETF Land this year.
In a 2019 ETF outlook media call on Friday, Michael Iachini, head of manager research at Charles Schwab Investment Advisory, gave his three cents on which sectors could be primed for fee compression.
First, he took a look back to 2018 and what happened with gold ETFs. “The competition on price we saw from gold really took me by surprise,” he said. “We saw multiple gold products go below 20 basis points, and it looks like there’s at least one more in registration that could have a low expense ratio.”
Regarding the future, Iachini said municipal bonds haven’t seen a lot of price competition yet. He noted there are three muni-bond ETFs with expense ratios under 10 basis points, but most of the rest of the muni space are over 20 basis points (a few are at 18 basis points).
“That’s an area where I wouldn’t be shocked, especially if investor flows pick up, where we could see some competition on price,” Iachini said.
Foreign small-cap stocks, which he described as “a sleepy corner of the ETF market,” also could be in line for price consolidation.
“There are a couple of products that are 12 and 13 basis points, which is pretty aggressively priced,” Iachini said. “But the rest of the foreign small-cap space is at 35 basis points or higher. This is a $22 billion segment of the market, so it’s not huge but it’s meaningful in terms of assets. There’s certainly opportunity there in the foreign small-cap space [for fee compression].”
Low-Vol
Among smart beta funds, Iachini said he expects to see more investor interest in low-volatility ETFs this year given the possibility for continued market volatility. He noted that flows into low-vol ETFs were about $12 billion in 2018, and ended the year with a total asset level of just under $60 billion.
“That’s a pretty big chunk of change on a percentage basis for the group in 2018, and that’s a trend I think could continue in 2019,” Iachini said.