Indexing Costs Could Be Next Battlefield in ETF Fee War

Fidelity’s recent decision to sell no-fee funds shined a glaring light on traditional index providers and potentially marked the beginnings of a potential escalation in the ETF fee war.

Ron O’Hanley, the former boss of State Street Global Advisors and the next chief executive of the wider State Street group, argued that the high-profile launch of Fidelity’s no-fee funds put the cost of using brand-name benchmarks into sharp relief, the Financial Times reports.

“It’s a reaction to the fees that the index providers continue to impose on money managers and investors,” O’Hanley told FTfm. “If you look at where costs have been coming down, it’s the management fees. Where they have not is the cost of using indices.”

As the global price war escalates in the passive fund management industry, costs are pushing closer and closer toward zero, with some of the cheapest ETFs now showing a 0.03% expense ratio, but ETF providers are now running out of ways to slash fees. Some fund issuers have highlighted the high fees they are still paying index providers for using their benchmarks.

In-House Indices

In a bid to cut costs to provide a competitive edge, some fund providers are looking into developing in-house indices. For instance, Fidelity recently launched two index funds with no fee exposures by using its own proprietary benchmarks.

State Street Global Advisors also recently relaunched a range of its ultra low-cost ETFs last year with expense ratios as low as 0.03% after replacing FTSE Russell benchmarks for its own proprietary indices.

Looking ahead, O’Hanley anticipates more ETF providers to launch in-house benchmarks and replace external providers for certain products as the industry looks to trim the fat.

“If you are a retail client who is a long-term investor in the markets, you are looking for exposure to the US large-cap market, not necessarily the S&P 500,” O’Hanley said of the most popular index of large US stocks.

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