Jonathan Burton's Life Savings: ETF investors win as fund firms fight to cut fees

By Jonathan Burton, MarketWatch

An earlier version of this story, published Jan. 5., misspelled
Tamara Bohlig's name. The story has been corrected.

SAN FRANCISCO (MarketWatch) — A price war is slashing expenses to
the bone on index-tracking exchange-traded funds and mutual funds. And
that suits Harold Evensky fine.

"It's great," said the Coral Gables, Fla., financial adviser,
who makes those funds a mainstay in his portfolios. "My clients get
the benefit."

For a long time, traditional index funds were the vehicle of choice
for cost-conscious investors, but now the ETF marketplace holds the
lowest fees and most intense cost competition. Industry giants
including Vanguard Group, BlackRock Inc., Charles Schwab Corp. and
State Street Corp. are locked in a race to see who can cut expenses
the fastest, vying for penny-pinching investors who have become
increasingly sensitive to costs after years of subpar results.

!! ETFs In A Classic Price War !!

The biggest providers of exchange-traded funds are battling to cut
management fees, according to Matt Hougan of researcher Jonathan Burton reports.

And the fight is still in the early rounds. Further cuts are likely
among popular broad-market ETFs and funds, as well as on products in
niches such as emerging markets and industry sectors.

Take Vanguard, which has been aggressively cutting fees. Some of its
ETFs are likely to get even cheaper in the near future, said Joel
Dickson, a senior investment strategist at the firm. One possible
candidate for a cut, he said, is the popular Vanguard Emerging Markets

"Given that asset returns have grown faster than costs, I would
expect some further downward pressure on expenses," he said.


Bips On The Radar


On the surface at least, the battle is over basis points, or
"bips" in industry jargon — tiny slivers of a fund's expense
ratio, each equal to 1/100th of 1% of fund assets a year. It may not
seem like much, but in this market every bit helps. "Every basis
point counts," said Evensky. "In a low-return environment, fees
can have a huge impact."

So, for ETF and mutual-fund providers, slashing points is a way to
gather assets, build market share and retain customers.

In October, Vanguard cut fees for investors in many of its index
mutual funds by dropping the minimum investment required to buy its
reduced-fee Admiral class of shares. On broad stock-market index
funds, that minimum dropped to $10,000 from $100,000 — and Vanguard
automatically shifted qualifying investors to the cheaper shares.

How much did investors end up saving? Qualifying Vanguard 500 Index
 investors, for instance, saw expenses fall to seven basis points, or
seven cents on every $100 invested, from 18 basis points in their
previous Investor-class shares.

The ETF version of Vanguard 500, Vanguard S&P 500 ETF
, charges even less: six basis points. The nearest-priced
ETFs that also track the Standard & Poor's 500-stock index

BlackRock's iShares S&P 500 Index
 and SPDR S&P 500 ETF
 from State Street Global Advisors, a unit of State Street
— each run nine basis points.

Schwab, meanwhile, cut fees on six of its most popular ETFs last year
in a direct challenge to Vanguard. Schwab U.S. Broad Market ETF
 now charges six basis points. Its closest-priced rival is
Vanguard Total Stock Market ETF
 at seven basis points.

"We are very competitively priced," said Tamara Bohlig, a Schwab
vice president who oversees the firm's ETF business.

Source: Marketwatch.Com