‘Fee War’ Could Hit Specialty, Niche ETFs Next

Specialized exchange traded fund strategies have attracted investment interest due to their alternative beta or “enhanced” indexing styles, but as more sponsors eye the space, fees could begin to stand out.

More investors are using alternative beta products, like low-volatility or minimum-volatility ETFs, fundamentally weighted ETFs and other factor-based index ETFs as a part of a core allocation strategy, reports Jackie Noblett for Ignites. [ETF Fees: Competition is a Good Thing]

Industry observers believe that a combination of ETF growth in targeted niche strategies and assets could drive expenses lower.

For instance, Invesco PowerShares has made a pre-emptive move against would-be competitors, lowering fees on its smart beta products by 21 to 36 basis points across six ETFs.

“We believe the lower fees better align the six funds with our existing offerings and help position the PowerShares family of ETFs for continued growth,” Ben Fulton, former managing director of global ETFs at PowerShares, said in a statement at the time.

PowerShares is competing against iShares and SPDR in the low-volatility ETF market space. The PowerShares SP 500 Low Volatility Portfolio (SPLV) has a 0.25% expense ratio, the iShares MSCI USA Minimum Volatility Index Fund (USMV) has a 0.15% expense ratio and the SPDR Russell 1000 Low Volatility ETF (LGLV) has a 0.20% expense ratio. [iShares: No, It’s Not A Minimum-Volatility ETF Bubble]

“The ETFs are not the same but I think people are viewing them in the same way,”  Todd Rosenbluth, director of ETF research at SP Capital IQ, said in the article. “Even though you shouldn’t just be choosing the cheapest one of the three … it’s reasonable to think that low-volatility [or] minimum-volatility ETFs will try to differentiate themselves on price among other things.”

Investors have shown a tendency to lean toward low-cost ETF options. According to Vanguard, equity ETFs in the lowest cost quartile with an average of 0.14% in expenses saw $152 of the $204 billion in U.S. equity ETF inflows between 2002 and 2012, whereas ETFs in the highest cost quartile with an average 0.66% in fees attracted $13 billion over the same period.

For more information on the ETF industry, visit our current affairs category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.