Fund Fee Wars Heat Up

Fund Watch

Fund Fee Wars Heat Up

Expense ratios for some funds are rapidly approaching zero.

Good news for investors: Fund fees keep dropping. The expense ratios of some exchange-traded funds are now approaching zero. What’s more, some mutual fund sponsors that have traditionally charged commissions have begun making their funds available without loads.

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BlackRock, sponsor of the iShares exchange-traded funds, cut the expense ratios for 15 of its broad-market ETFs and five of its index mutual funds in October. Schwab retaliated soon thereafter, trimming fees for five of its ETFs. Last summer, Fidelity cut fees for 27 of its funds and ETFs. It now charges less for some of its index funds than does Vanguard, the indexing leader (see Fidelity Challenges Vanguard on Mutual Fund Fees). BlackRock’s latest move makes iShares Core S&P 500 (symbol IVV), which charges 0.04% annually, the lowest-cost ETF that tracks Standard & Poor’s 500-stock index. (The fund is a member of the Kiplinger ETF 20.)

The big news on the commission front comes out of Los Angeles, home to the American Funds, the nation’s second-largest fund sponsor, with nearly $1.3 trillion in assets. Since the early 1930s, Capital Group, American’s sponsor, has sold its funds exclusively through investment advisers and brokers, who charge a commission of up to 5.75%. But in October, Capital made the F1 share class of each of the American Funds available commission-free to investors on the Fidelity and Schwab online brokerage sites. “The ability for investors to stay with American Funds, particularly when they roll over 401(k) retirement savings from an employee-sponsored plan to an IRA, is important,” says Hannah Coan, a Capital Group spokes­person. American joins other formerly pure load shops, including J.P. Morgan, Morgan Stanley and Oppenheimer, in offering their funds load-free at selected online brokers.


The Department of Labor’s new fiduciary rule, which is slated to go into effect in April, may be responsible for some of the price cuts. The regulation would require financial professionals who offer investors advice on retirement accounts to put their clients’ best interests ahead of their own. (Brokers are now required merely to offer recommendations that are “suitable” for their clients, a looser standard.)

The case for ETFs. BlackRock and others think the new standard will push advisers to focus more on costs and, consequently, look more favorably toward ETFs, most of which track indexes and charge low fees. Says Martin Small, head of U.S. iShares at BlackRock: “If you’re holding for the long term, you really care most about the expense ratio.”

Why do costs matter so much? It’s one of the few aspects of investing that you can control. All things being equal, the less you pay in fees, the more of a fund’s earnings are left for you. “Lower costs mean better returns and a greater ability for investors to meet their financial goals,” says Joel Dickson, Vanguard’s head of investment research and development. In fact, fees have been falling for years.

But fees aren’t everything. Unless you are comparing funds that track the same index, you need to look beyond expense ratios, says Todd Rosenbluth, head of fund research at CFRA, a research firm. Take iShares Core MSCI Emerging Markets ETF (IEMG) and Vanguard FTSE Emerging Markets ETF (VWO). The iShares ETF costs 0.01 percentage point less than the Vanguard ETF. But the funds track different indexes. The iShares ETF holds Korean stocks but does not hold Chinese A-share stocks, which are traded in yuan, the local currency. VWO holds a handful of Chinese A-share stocks but no Korean securities. “Investors need to look beyond just one data point when making decisions,” Rosenbluth says.