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ETF Fees Race Toward Zero

By Motley Fool Staff – Nov 22, 2016 at 7:41AM

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The fund management giants are waging a fee war, and retain investors are the winners.

Management fees are plummeting toward zero. BlackRock (BLK 1.08%) recently slashed fees on 15 of its exchange-traded funds, a move that an executive described as being part of its plan to manage the single largest ETF in existence. Charles Schwab (SCHW -0.53%) responded by slashing fees on some of its funds to reclaim its title of having the least expensive ETFs on the market.

In this segment of Industry Focus: Financials, join The Motley Fool's Gaby Lapera and Jordan Wathen as they discuss increasing competition in asset management, and how it's benefiting all investors.

A full transcript follows the video.

This podcast was recorded on Nov. 7, 2016.

Gaby Lapera: Apparently, The Wall Street Journal put out an article about index investing.

Jordan Wathen: Right. The Wall Street Journal basically turned October into a discussion on index investing, and basically, the rise of passive investing. It was over the course of a series of articles that basically detail how passive funds are pretty much the only investment funds anymore that are bringing in money on a net basis. So, money is leaving funds that are actively managed to be invested in index funds. Obviously, this rise has been super important for the financial industry. Active investors are probably under more pressure now than they ever have been to generate results, to go beyond, or beat, or exceed their index.

Lapera: This is actually a really timely story, because we talked about this on a podcast while I was gone, about active management vs. index tracking. One of the biggest players in this space is BlackRock. I know, you said they said some pretty extreme things post this Wall Street Journal article.

Wathen: Right. What's happened, basically: There's an ongoing fee war in passive funds. Just to get down to the very basics, there's no difference between index funds. If an index fund tracks the S&P 500, it just tracks the S&P 500. So, the best fund to invest in is the one that can do [that] the least expensively, that charges the lowest fees to investors. Basically, BlackRock is engaging in an all-out fee war now. They came out and reduced fees on 15 of their exchange-traded funds, which have about $220 billion in assets, so it's a huge pool of assets. And some of the big cuts were to their S&P 500 ETF, [which] trades under the ticker IBB. They cut that fee almost in half, from seven basis points to four basis points. They cut their fees on an aggregate bond ETF, which is basically a total bond market -- it basically tries to design a portfolio so that it looks like the bond market as a whole -- they cut that fee from eight basis points to five basis points.

And then, after this, interestingly enough, an executive at BlackRock went to Bloomberg and said, "Our plan, basically, is to make our S&P 500 ETF the biggest in the world." Basically, in no uncertain terms, he's saying, "We're going to compete on fees and make sure this is the biggest." And then, of course, you can't have a fee cut without someone else coming in. Charles Schwab followed it up. And because BlackRock actually matched their pricing on their bond ETF, they cut theirs by one basis point, so it'll be four basis points instead of five, just so they can be the cheapest.

Lapera: That's incredible. I feel like, potentially, Vanguard might end up having a run for their money. 

Gaby Lapera has no position in any stocks mentioned. Jordan Wathen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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