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Cost Competition: Inflows Surge For Cheap ETFs (BND, AGG, VWO, EEM, GLD, IAU)

December 19th, 2011

Jared Cummans: The ETF industry has been praised for the many advantages that it offers investors. Exchange traded products are liquid, transparent, and cover a broad range of investment classes to help round out portfolios. On top of all of these advantages lies the cost factor; one of the founding principles of ETPs was to maintain cost efficiency that had been lost on mutual funds. With some funds offering expenses as low as just five basis points, investors have been reaping the rewards of effective fee structures ever since the first ETF debuted [see also Giving Thanks: Ten Reasons ETFs Are Better Than Mutual Funds].

In recent years, issuers have began something of a cost battle by slashing prices to gain an edge on a similar fund offered by a competitor. Many were unsure how this strategy would turn out, as the ETFs who saw costs drop would now make less money for the issuer unless they attracted a significant amount of assets. While it has not worked in every case, there are three clear-cut examples of cost-cutting generating massive inflows for 2011. Below, we outline these three specific instances and how big of a difference a few basis points can make [see also 12 High-Yielding Commodities For 2012].

GLD vs. IAU


The SPDR Gold Trust (NYSEARCA:GLD) has long been the most popular gold fund on the market, and for a very brief moment this year, it was the biggest ETF in the world.  With over $69 billion in assets, it is clear that this physically-backed product is an investor favorite. But the COMEX Gold Trust (NYSEARCA:IAU), which also tracks physical gold bullion, has been offering GLD stiff competition ever since it slashed its expense ratio last year. Currently, GLD charges 40 basis points to all of its holders, while IAU charges just 25 basis points, making it cheaper for virtually the same exposure [see also Three Reasons Why Gold Is Overvalued].

Through the first eleven months of the year, GLD had inflows of about $1.88 billion, a strong period by most accounts. But its cheaper competitor doubled that figure with inflows of $2.75 billion. Bear in mind that both funds offer nearly identical exposure (with a few minor differences), making this result an important one to note. It is clear that cost-conscious principles are setting in for investors, and from an issuer standpoint, the attraction of more assets can counteract the losses from the cut expenses.

AGG vs. BND

When it comes to the fixed income space, two funds reign supreme. Barclays Aggregate Bond Fund (NYSEARCA:AGG) from iShares and Total Bond Market ETF (NYSEARCA:BND) from Vanguard both come in with just under $14 billion in AUM and average daily volumes that eclipse the one million mark. The funds track the exact same index and are both over four years old. Just about the only thing that sets these two apart is expenses. AGG charges its investors 0.22% for exposure, pretty cheap by most standards. But in a very Vanguard fashion, the issuer charges just 11 basis points for investment in BND, so it should come as no surprise to see BND winning the popularity contest [see also The Five Biggest ETF Inflows Of 2011].

Through the end of November this year AGG has attracted inflows of $2.24 billion compared BND which doubled that figure, amassing inflows of $4.42 billion. Given that IAU is an iShares product, it is generally surprising to see that the issuer hasn’t lowered down its fees to keep up with Vanguard, especially now that BND has just recently surpassed AGG in assets.

EEM vs. VWO

This story has been developing for quite some time, as the MSCI Emerging Index Fund (NYSEARCA:EEM) and the Emerging Markets ETF (NYSEARCA:VWO) have been in stiff competition for the crown of emerging markets funds. Though EEM was the leader for quite some time, VWO recently surpassed its counterpart in AUM, as its fee structure is simply too enticing for most to overlook. EEM charges its investors a whopping 69 basis points while VWO structured its expenses at just 0.22%. Note that both products track the MSCI Emerging Markets Index. With a cheaper expense ratio, VWO quickly took a commanding lead in the emerging market space, with an interesting trend developing on the year [see also Emerging Market ETFs: Seven Factors Every Investor Should Consider].

2011 has been a terrible time for most emerging market investments, as global volatility has plagued these unstable economies. So to see VWO as the fund with the highest inflows of its 1,400+ competitors is quite surprising. But looking deeper, there is a clear cut reasoning behind VWO’s surge in inflows. This ETF raked in $7.70 billion through the first 11 months of the year, and it is by no coincidence that EEM lost $7.25 billion, the most by any ETF. It seems that investors have simply been reallocating their emerging market holdings from EEM to VWO in order to save money. Though EEM has a much more active options market as well as higher ADV, the ETF may be in trouble down the road if it doesn’t compete with Vanguard’s cheap fees.

Written By Jared Cummans From ETF Database Disclosure: No positions at time of writing.

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NYSE:AGG, NYSE:BND, NYSE:EEM, NYSE:GLD, NYSE:IAU, NYSE:VWO


 

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