Investing: A truce in the low-fee fund wars
When it comes to mutual-fund fees, “the race to zero is over,” said Asjylyn Loder in The Wall Street Journal. Though last year Fidelity introduced much-hyped zero-fee index funds, the average cost for index funds that invest in big U.S. companies actually “barely budged” in 2018. That’s because costs had already hit the point where for most investors, “cheap is cheap enough.” In fact, “not one of Fidelity’s four zero-fee funds is among the firm’s top 10 most popular this year.” Meanwhile, BlackRock’s iShares exchange-traded fund (ETF) took in record inflows in the fourth quarter without cutting prices. Lower fees are not resonating with consumers, who look at free offerings and “wonder if there are strings attached.”
There usually are, said Barry Ritholtz in Bloomberg.com. “When for-profit companies offer a service at no charge, it means the true costs are hidden or recouped in some other way.” We may not be sure of what that way is, but you can bet that it’s in there. “A recent study found that as many as 23 percent of trades in 2016 were executed at something other than the best price, costing investors $2 billion in additional fees.” And that’s before the recent launch of commission-free trades on ETFs by Fidelity and Charles Schwab. These firms and others have been trying to imitate Vanguard, the “runaway leader” in keeping costs low. Indeed, other brokerages have raised their game. But they still haven’t “quite mastered the art of running super lean,” and the financial industry is now having second thoughts about “giving its stuff away.”
The new trend was on display last week at InsideETFs, a big financial industry conference, said Crystal Kim in Barron’s. There, “virtually no one—not even Vanguard—was talking about passive, broad-market index investing.” In fact, Vanguard, known for its index funds, “kicked off the conference with a keynote speech that made the case for active management.” Fees have fallen for all types of funds, and costs are now low enough for some actively managed funds to make them worth considering.
Brokers and financial advisers have filled the demand for passive index funds, said Annie Massa in Bloomberg.com. Now they’re getting more creative with new fund offerings. Famed investor Paul Tudor Jones, for instance, has launched a nonprofit that manages an ETF that uses a “values-based ranking” to select investments. You’ll see more experiments like that as fund managers take a break from lowering costs. But you can expect that, eventually, the competition to offer ever-cheaper funds will resume. “Lowering fees has a near-perfect record of working for ETFs. It’s the mother of all trends.”