Less Than Zero: A Look Into a Wild Two Weeks in the ETF Fee War

Episode Summary

Executive Summary: The episode examines the ETF industry’s intense fee war, showing how established giants and new entrants alike are cutting fees to near-zero or even below zero to win attention and assets. The discussion highlights the business strain on asset managers, the role of advisor-driven demand for low-cost funds, and how consolidation and bear markets may reshape the industry.

Main Topics: The ETF fee war intensifies (Priority: 5/5): Hosts and guest trace a recent burst of fee cuts across ETFs, noting this was unusually broad and intense, affecting major issuers and newcomers alike. New entrants using zero-fee launches for attention (Priority: 4/5): SoFi and Salt Financial used fee waivers or negative-fee incentives to launch ETFs and attract headlines, illustrating how newcomers can now enter asset management through ultra-low-cost products. Core equity wars among giants (Priority: 5/5): Vanguard, BlackRock, State Street, and Schwab are battling for dominance in core portfolio products like S&P 500 and total market funds, where tiny fee differences can drive huge flows. Fee cuts spread to niche categories (Priority: 4/5): The pricing battle extended beyond core equity funds into junk bonds, thematic ETFs, Japan exposure, and ESG, showing that low-fee pressure is now pervasive. Economic pressure on asset managers (Priority: 5/5): The episode explores how zero or near-zero fees challenge profitability, forcing managers to rely on scale, securities lending, upselling, or adjacent businesses to earn money. Industry consolidation and bear-market risk (Priority: 4/5): The hosts argue that sustained fee compression could accelerate consolidation and that a bear market may expose weaker firms and prompt acquisitions by larger, more efficient players.

Key Arguments: Fee compression is no longer limited to a few large players; many issuers now feel compelled to compete on price because cost has become central to ETF buying decisions. Zero-fee or negative-fee launches are less about long-term profitability and more about generating awareness, building a client base, and gathering seed assets. For large firms, lower fees can be offset by scale, securities lending, cross-selling, or moving further into advisory and technology services. Advisor-led distribution has intensified demand for cheap products, but it may also pressure asset managers to move closer to end clients and compete with advisors. Even in categories where investors may value a strategy strongly, such as ESG or themes, flows still tend to concentrate in the lowest-cost offerings. A bear market could make the economics of ultra-cheap funds harder and force a wave of consolidation, with stronger firms acquiring weaker ones. Inflow reaction suggests that even one basis point can materially change fund competitiveness, especially in core index products.

Data Points: ETF fee-war outbreak duration: About two weeks - Hosts describe the most intense recent round of fee cuts as happening over roughly a two-week span. Number of issuers involved: About 10 issuers - The fee war affected a wide set of firms across the industry. Number of ETFs affected: About 20 ETFs - The episode says around 20 funds were impacted by cuts or fee waivers. SPDR S&P 500 ETF Trust (SPY) expense ratio: 20 basis points - Referenced as the original ETF pricing anchor in the early ETF fee war. Vanguard S&P 500 ETF fee cut effect: 1 basis point lower than a rival - Used as an example of how tiny fee differences can drive major flow changes in core ETFs. Bloomberg Intelligence flow statistic: 97% - Nearly all flows into index funds went into products charging less than 20 basis points. Asset manager index performance: Down 17% - Bloomberg Intelligence noted asset managers underperformed during the period after Fidelity’s zero-fee move. S&P 500 during same period: Up 6% - Used to show relative underperformance of asset manager stocks. BlackRock/Vanguard core ETF inflows share: 25% of inflows - The four core ETFs from BlackRock and the four from Vanguard captured a quarter of inflows over three years. Starting asset share of those core ETFs: About 18% - Those eight ETFs represented a smaller share of assets initially than their share of flows. Thematic ETF average fee: 62 basis points - Compared with Defiance’s 30-basis-point 5G ETF as a relatively cheap thematic product. Asset-weighted thematic fee average: 60 basis points - Referenced to show that thematic funds generally remain much pricier than core ETFs. Defiance 5G ETF fee: 30 basis points - Used as a low-priced thematic ETF meant to preempt larger competitors. Defiance thematic capture score: 36% - The thematic revenue exposure of the 5G ETF was described as relatively low. BlackRock Japan ETF fee: 15 basis points - BlackRock launched cheaper Japan products to compete with JPMorgan and others. BlackRock legacy Japan ETF fee: 47 basis points - EWJ was cited as the older, more expensive Japan exposure fund. JPMorgan Japan ETF fee: 19 basis points - Mentioned as a catalyst for BlackRock’s cheaper Japan product. DWS ESG ETF fee: 10 basis points - USSG was introduced as one of the cheapest ESG ETFs in the U.S. Vanguard ESG ETF fee: 12 basis points - Cited as already gathering significant assets in the low-fee ESG space. Vanguard ESG ETF assets: 280 million - Assets cited for Vanguard’s low-cost ESG offering after less than a year. State Street high-yield ETF fee: 15 basis points - State Street converted SJNK into a broader high-yield ETF at a sharply lower fee. Deutsche Bank HYLB fee: 20 basis points - Referenced as a prior low-fee benchmark in the junk bond ETF space. JP Morgan new ETF fee: 2 basis points - One of the cheapest products in the market, excluding fee waivers. Schwab fee cuts: 1 basis point each - Schwab reduced fees on small-cap, mid-cap, and dividend ETFs. Salt Financial incentive: 50 cents per $1,000 invested - A negative-fee-style promotional incentive for the first year of its ETF. BlackRock S&P 500 index mutual fund fee: 0.0125% - Cited as an even cheaper move in mutual funds, undercutting Fidelity by a tiny margin.

Pivotal Quotes: "This ETF fee war is nothing new. But what was different was the intensity of this particular outbreak." — Eric Balchunas: Describing the unusually aggressive and broad wave of fee cuts. "It really speaks to exactly how important cost has become within the ETF market." — Rachel Evans: Explaining why issuers of all sizes are compelled to compete on price. "This is really wild and scary for everybody's livelihood." — Eric Balchunas: Reacting to the industry's fear that fee compression threatens asset managers' economics.

Implications: Fee compression is becoming structural, not temporary. Expect more zero-fee launches, deeper consolidation, and continued pressure on asset managers to scale, diversify revenue, or be acquired.