ETF fees continue to plummet—which is all good news for markets and investors, argues Todd Rosenbluth on WealthManagement.com. Rosenbluth, the director of mutual fund and ETF research at CFRA, is a smart guy, and I generally respect his insights. On this topic, I believe that his argument that investors benefit from fee wars because their investment growth compounds faster is short-sighted. Yes, statistically and over the short term, his case is accurate. However, in the long term, the fee wars really hurt the industry and, therefore, investors at every level, from small retail investors to advisors to institutions.
In the rapidly growing and evolving ETF industry, the quest for dominance resembles the oil industry in the late 1800s, when product pricing and distribution were tightly controlled to undercut any newcomers and squash innovation. In a near monopoly, falling prices offered no real benefits to consumers.
Similarly, in 2020, the ETF fee wars strangle innovation and competition. A near-zero fee environment makes it hard for new firms to form and new products to gain traction. That hurts advisors, individual investors and even institutions.
Like the oil companies of the Rockefellers, large ETF issuers race to zero fees, knocking out competition. This makes it harder for new issuers to launch and ultimately stifles innovation. Right now, many new launches are coming—not from emerging ETF shops but from long-known names in sister industries. Unlike pure startups, they have the resources and distribution relationships to make things happen. Many new ETFs are being seeded by mutual funds, target date funds and resources shifting from one pocket to another. Established companies are trying to keep assets in-house, even if they take a hit on fees.
The future of investing doesn’t lie in passive index tracking for near-zero fees. We need innovators to bring new products to market. No one minds paying for performance, real diversification, absolute returns, stable high yield, risk mitigation and—most of all—innovation. Paying for alpha, beating these benchmarks, and wealth preservation should be the quest of every new manager and ETF issuer. Research departments and consultants to every wealth manager, retirement plan, insurance company and defined benefit plan are consistently seeking strategies and products aimed toward this goal.
Near-zero fees make sense for older, commoditized passive products. They have no place in innovative products that perform. The industry needs to compete when it comes to ideas, investment processes and performance. Smaller and mid-size ETF issuers need to grow, thrive and remain innovative. We can help. If all we compete on is price, then the commoditization of the industry will be its ultimate defeat.
Andrew Corn is the CEO of E5A Integrated Marketing, a systematic, data-driven investor-acquisition-focused agency that assists firms with raising assets or capital. Previously he was the CIO for E5A Funds, a firm specializing in alternative investments and after-tax alpha strategies.