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ETF Fee War Hits ESG and Active Management


By Elisabeth Kashner, CFA  |  January 22, 2020

The top ETF story of 2019 isn’t non-transparent active, ESG, or marijuana. It’s not commission-free trading or the Schwab-TD tie-up.

It’s the relentless demand for super-low-cost ETFs. Investor appetite for ever-cheaper ETFs is driving flows and shaping asset growth. Investors are demanding low-cost funds across every strategy group in equity, fixed income, and even commodities. That includes actively managed ETFs, ESG, and smart beta. Asset managers are adapting, but are they moving fast enough? Those currently queuing to enter the ETF business should pay close attention to ETF pricing, especially in ESG and active management.

Fee Cuts

Fee compression saves investors money but creates challenges for fund issuers. Compression came by way of fee cuts and via asset transfer to lower-cost products.

2019 fee cuts returned $95 million to investors over the course of the year. Fee cuts outnumbered hikes by a factor of seven. ETF issuers dropped expenses for funds containing 31.5% of assets over the course of 2019. Fee hikes were scarce, covering just 4.1% of ETF assets.

Expense Ratio Changes 2018-19

New investors and those who sold expensive ETFs in favor of cheaper alternatives benefitted too, as their overall costs dropped. A look at the top ETFs by net flows tells the story. Six of the top 10 ETFs saw a fee drop this past year.

Net Flows Top 10 ETFs of 2019


2019 Flows ($B)

Cost 2018

Cost 2019

Vanguard Total Stock Market ETF




Vanguard S&P 500 ETF




iShares Edge MSCI Min Vol U.S.A. ETF




iShares Core MSCI EAFE ETF




Vanguard Total International Bond ETF




Vanguard Total Bond Market ETF




iShares Core U.S. Aggregate Bond ETF




iShares Core S&P 500 ETF




iShares MBS ETF




iShares U.S. Treasury Bond ETF




Source: FactSet

All but two of the top-flows ETFs ended 2019 with expense ratios at 0.10% or lower. Half of them charged 0.05% or less. There’s not much room below that.

Flows Follow Fees

By the end of 2019, the asset-weighted average annual expense ratio for U.S.-listed ETFs was down to 0.20% vs. 0.21% one year prior and 0.23% in December 2017. At year-end asset levels, that translates to $600 million of investor savings this year.

ETF expense ratios dropped even lower in equity and fixed income funds, as illustrated in the chart below.

Asset weighted average ETF fees history by asset class

To fund issuers, the trends present a challenge. The top asset gatherers of 2019 ended the year with asset-weighted ETF expense ratios of 0.20% (Blackrock/iShares), 0.06% (Vanguard), and 0.08% (Charles Schwab). All three are cheap, but Vanguard and Charles Schwab’s low expense ratios are putting their competitors on the hot seat.

The two charts below tell the story of all six asset managers who captured at least one percent of 2019 net flows and offers a composite view of the other 122 ETF firms. The first chart compares each firm’s share of 2019 flows to its asset-weighted expense ratio, illustrating investor behavior through an issuer-choice lens. The second chart shows changes in issuer market share by comparing the percentage of 2019 assets to the year’s flows. In this view, Blackrock’s 0.20% asset-weighted average expense ratio looks less attractive, as the firm held 39% of U.S. ETF assets, but captured only 37% of the 2019 flows. Vanguard and Charles Schwab did the opposite, with 26% and 4% of ETF assets but 32% and 7% of 2019 flows.

ETF asset weighted expense ratio and share of 2019 flows

2019 ETF market share by assets and flows NEW

Issuers have adapted to this new ultra-low-fee environment. Some, like the big three, are using their scale to drive efficiencies, offsetting lower margins with higher asset bases. A few target clients with specialized needs, offer products that lend themselves to a storyline. Others are taking a niche approach, offering differentiated products at a higher price point.

Cost Pressure Everywhere

As the differentiation approach proliferates, pricing power has become vulnerable. New strategies within a segment are often offered at a relatively high price point at the outset, until competitor ETFs launch. Then, the fee war arrives.

Investors who stuck with plain vanilla equity ETFs, those predominantly broad-based, always cap-weighted stalwarts, saw their fees drop from 0.17% to 0.15% over the past two years. But the more dramatic drops came in other strategy groups. As indicated in the chart below, “smart beta” or strategic funds now cost 0.05% less than then they did at the end of 2017, and active management in an ETF is now more efficient by 0.09%.

Asset weighted average equity ETF fee history by strategy group

Taking a more granular view, we can see the effects of the price war at the strategy level. All 10 of the top equity strategies (by flows) saw their asset-weighted expense ratios fall during 2019, as did eight of the top 10 fixed income strategies.

 Asset weighted expense ratio by ETF strategy - Equity

Asset weighted expense ratio by ETF strategy - Fixed Income

Hottest Strategies, Cheapest Choices

Investors chased savings most dramatically in the hottest corners of the ETF market.

ESG and active management in the equity space hosted riveting fee wars. The case studies presented below can help issuers understand how to price new products and decide when to drop pricing on existing ones. The experience of active managers who are already competing in the ETF marketplace can be informative for those who are gearing up to launch non-transparent active ETFs.

ESG grew rapidly in 2019, but not all ESG funds thrived. Cost played a huge role, as evidenced by the drop in asset-weighted ESG expense ratios from 0.27% in 2018 to 0.21% in 2019. In the U.S. Total Market segment, 2019’s investors chose among eight broad-based ESG funds, plus one that launched mid-December (excluded from the chart below because of its late launch).

Flows and expenses were nearly perfect inverses. The cheapest ESG ETFs, custom built for a Finnish insurance company, jointly brought in over $3.1 billion, while the most expensive, SerenityShares Impact ETF (ICAN), closed shop.

Broad-based ESG funds, US total market 2019 flows and expense ratios

Yet the most dramatic ETF expense ratio story of 2019 belongs to actively managed equity funds. Specifically, funds with human stock pickers, especially in the U.S. size and style category. The ones who compete outright for investor dollars without a bespoke source of funding had the biggest fee war of all.

The story starts in the U.S. equity asset class where non-transparent active ETFs are now allowed to operate. Ninety-six ETFs with active-specific SEC exemptive relief were available during 2019. But not all of these funds have stock pickers at the helm. Some are rules-following funds that for technical reasons, such as derivative use or implementation of non-indexed AI, need to register as active with the SEC.

55 of the 96 are truly active funds, the ones where humans make material buy and sell decisions. Fifty of these focus on the size and style category—large, mid, small, and total market; value, growth, and core. The other five are sector funds; three have no competition from other active managers, while two compete in the MLP space.

The playing field for the fifty is not level. Some, like Aptus Collared Income Opportunity ETF (ACIO), have bespoke funding sources for the majority of their assets while others like Pacific Global U.S. Equity Income ETF (USDY) have no such advantage.

Aptus Collared Income Opportunity ETF

Pacific Global US Equity Income ETF

The no-advantage funds were the battleground for the fiercest fee fight in 2019. While the 50 stock picker funds with inflows had just a 0.09% differential in weighted average management fee between those with outflows (0.60%) and those with inflows (0.51%), the no-advantage funds had a 0.16% gap, as the funds with inflows charged 0.43% in asset-weighted management fees and those that lost assets charged 0.59%. These figures may change as year-end 13-F reports become available, allowing for additional identification of bespoke funds.

Here is how the truly active U.S. size and style fee war looked for both bespoke and no-advantage ETFs, based on 13-F reports as of September 30, 2019.

2019 flows-weighted mgmt fees actively managed US equity ETFs

Ignore Cost at Your Peril

The market has spoken. Asset managers hoping to launch new actively managed funds in the U.S. size and style segments should take note. Those with dedicated funding sources might get away with charging 0.50% in management fees, but those without had best come in at 0.40% or lower if they hope to gather assets.

While actively-managed ETFs do command a premium over their passive segment counterparts, investors are cost-conscious in all asset classes, segments, and strategies. While the broad vanilla funds grab the headlines, the fee war rages everywhere in ETF land.

After all, Vanguard’s Total Stock Market ETF (VTI) investors are now paying just 0.03% for exposure to 99% of the U.S. stock market. VTI, combined with the fourth-most-popular fund, iShares Core MSCI EAFE ETF (EFA) and 2019’s two hottest bond funds, Vanguard Total Bond Market ETF (BND) and Vanguard Total International Bond ETF (BNDX), form a portfolio containing just about all the stocks and investment-grade bonds in the world. All this at a total cost below 0.05%.

Investors had every reason to celebrate 2019’s cost savings. Whether sticking with the cheapest broad vanilla funds or allocating to pricier strategies like “smart beta” and active management, ETF holders lowered their investment costs and raised their chances of meeting their financial goals. Issuers were kept on their toes. 2020 is shaping up to be mighty interesting.

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Elisabeth Kashner, CFA

Vice President, Director of ETF Research and Analytics

Ms. Elisabeth Kashner is Vice President, Director of Exchange-Traded Fund Research and Analytics at FactSet. In this role, she develops tools and methodologies for all aspects of ETF and mutual fund classification and analysis with a focus on costs, risks, trading issues, and performance. Prior, she served as director of research at ETF.com and published extensively on the classification, efficacy, and persistence of strategic beta strategies and robo-adviser portfolio exposures. Ms. Kashner earned a BA from Brown University and an MS in financial analysis from the University of San Francisco. She is a CFA charterholder.


The information contained in this article is not investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.