This fee sensitivity was more pronounced in equities than fixed income. Equity funds with the cheapest fees attracted 82% of all net inflows over the past five years, while the equivalent figure for fixed income ETFs was 55%. For fixed income, this disparity can be partly explained by the fact that fee levels are lower overall and the popular iShares Treasury bond ETFs all fall within the second fee quintile of their asset class.

Where are ETF fee wars biting the most?

Different types of ETFs have been swept up in the fee war to varying degrees, with fees for ETFs with broad exposures falling by much more than those with narrower exposures. Average fees in broad U.S. equity and fixed income funds fell by around 40% since 2012, while sector and factor ETF fees fell by a more modest 25%. Meanwhile, ETFs providing exposure to individual countries or international sectors and themes saw single-digit percentage fee declines and commodity funds on average saw no decline. The smaller fee declines in niche products can likely be explained by the fact they have smaller pools of assets (and thus lower economies of scale), face less competition, and often have higher trading costs due to lower liquidity.

Similarly, actively managed ETFs recorded a smaller decline in fees compared to passive ETFs in recent years. Investors tend to focus more on active funds’ returns/alpha than cost and their differentiated strategies result in less competition. On an AUM-weighted basis, actively-managed funds in aggregate have seen the same 9 bp decline in fees as passive funds since 2014, but this represented just a 15% drop on average for actively-managed funds compared with 32% for passive funds.

“Almost all of the decline in AUM-weighted fees for actively managed funds came over the past year and most of this decline is due to investor flows into lower fee actively managed funds, rather than expense ratio cuts by the funds themselves,” wrote Kolanovic and Kaplan.

Another recent trend in the ETF fee war is for major ETF issuers to relaunch or rebrand lower fee versions of simple market beta or “core” products in order to capture flows, largely from “buy and hold” investors seeking the cheapest passive products. These products have been at the front lines of the fee war, as they have seen repeated fee cuts and attracted large asset inflows in recent years. Examples of these core products include: iShares’ Core suite of 25 funds across asset classes, SPDR’s Ultra-Low-Cost Core ETFs, Schwab’s Core index funds, J.P. Morgan Asset Management’s BetaBuilders suite which offers a handful of broad market and country equity ETFs and a broad U.S. fixed income ETF, Invesco’s PureBeta funds and most of Vanguard’s ETF portfolio.

Are zero-fee ETFs here to stay?

During the past year, investors have witnessed the launch of the first funds with zero management fees. Fidelity was the first to market, with the launch of four mutual funds with zero expense ratio in second half of 2018. On the ETF side, this was followed by the launch of zero or negative fee funds this year by relative newcomers to the ETF space, but only on a limited or temporary basis. Fintech startup SoFi recently launched the first two ETFs with zero fees, albeit on a temporary waiver of their standard 19 bp fees. Another startup, Salt Financial, also recently launched a “negative fee” ETF, meaning it effectively pays investors for holding onto the fund. However the -5 bp fee is only on the first $100 million in AUM and only until April 2020, after which the fee is due to revert to its standard +29 bps.

“We have yet to see an ETF charging zero fees for an indefinite timeframe, but a number of broad U.S. equity ETFs have come close: the recently launched J.P.Morgan BetaBuilders US Equity ETF charges just 2 bps, and several other funds charge 3-4 bps,” added Kolanovic and Kaplan.