New ETFs with lower price points and more favorable annual fees

Oct 31, 2020 | 09:45 amYuval Bar-Or

I generally urge my readers to follow a passive investing strategy. Two of the most popular investments embraced by passive investors are the SPDR S&P 500 ETF (SPY) and the Invesco QQQ Trust (symbol QQQ). With assets of $305 billion and $137 billion, respectively, these two rank first and fifth among all funds.

This post is motivated by a recent Wall Street Journal article: ETF Clones Multiply in Industry Fee War. As a subscription may be required to access the article, I summarize some of its content here.

First, some background.

Technological innovation and competition combined in recent years to yield new investment products with very competitive prices. The ETF space has burgeoned, with thousands of new products and low prices, in particular for the ETF category of low-cost indexed funds.

Some funds became household names: the “Qs,” a reference to the fund traded under the ticker symbol “QQQ” and the S&P 500 tracking fund, “SPY,” are some of the best examples.

These two early generation funds are structured as unit investment trusts. Compared to a modern (basic) ETF structure, unit investment trusts have higher operating costs, which are passed on to investors in the form of higher annual management fees. SPY’s annual fees are 0.09% while QQQ’s is 0.20%.

The aforementioned article focuses on the launch of “copycat” funds invested in the same universe of companies but at lower fees and lower price points per unit.

Comparison of Originals & Copycat Funds

(all prices as of Oct 28, 2020)

The new copycat funds are available at lower, more accessible price points, and more importantly, the new funds offer more favorable fees for investors: SPLG (SPDR Portfolio S&P 500 ETF) has a fee of 0.03%, while QQQM (Invesco NASDAQ 100 ETF), has a fee of 0.15% (see table).

While offering new funds with lower fees is the competitive norm, in this case the copycat funds are offered by the same companies that manage QQQ and SPY. This is noteworthy because, in general, corporations resist offering a new, low-cost product that competes directly with an existing one due to concerns that the new product’s sales will “cannibalize” or replace an existing product’s sales, thereby harming the company’s revenues. In these cases, the companies felt compelled to create the lower priced products because they were already seeing some clients defect to comparable, lower-cost ETFs offered by competitors.

This is a reminder of the mantra I repeat to my students: always be on the lookout for lower fees. Even products we’ve come to consider as long-time industry favorites can be improved upon, and the hunt for lower fees must be ongoing.