The threat of inflation is concerning to many savers, worried their money won't go as far as it used to. But for S&P 500 investors, a popular asset — ETFs — is getting even cheaper.
This month, Charles Schwab's Schwab Asset Management unit slashed the fees on four of its ETFs. Schwab cut the fee in half on its Schwab International Equity ETF, for instance, from 0.06% to 0.03%. That pushes the cost of owning the ETF to practically zero. The fee to invest $100,000 in the ETF in year one would be just $30. Keep in mind, too, there's probably no commission to buy the ETF either at most online brokerages.
Schwab's move only intensifies a trend going on for years. ETFs, already a great low-cost option for investors, are getting even more attractive. Just months ago, Vanguard took a cleaver to many of its ETF fees.
And a number ETFs are already free, meaning they have no annual fee. A number of cryptocurrency ETFs, for instance, are still waiving their fees. And Amplify Cash Flow Dividend Leaders ETF continues to waive its annual fee giving it a net annual fee of zero.
"For many investors, ETF fees matter a lot and a fund needs to be cheap enough to justify putting new money to work," said Todd Rosenbluth, director of research for TMX Vetta Fi. "Every dollar that is saved from paying an asset manager is a dollar that can be invested in stocks or bonds to help achieve financial objectives."
ETFs Beyond S&P 500 Get Cheaper
Fees on ETFs are now so low, it's harder for them to keep dropping at the same rate, according to research from Morningstar Direct.
"Fees of prominent index mutual funds and ETFs are approaching a floor, with many already charging less than 0.05%," the Morningstar report said.
But are fees getting so low that the incremental gains are getting small relative to other considerations that ETF investors might have? Rosenbluth says it's important to watch fees, but also ETF performance and construction.
For instance, Schwab cut its fee on Schwab Emerging Markets from 0.11% annually to just 0.07%. It's great to save 0.04% annually. That's cheaper than the 0.09% charged by iShares Core MSCI Emerging Markets ETF.
But here's the rub. iShares Core MSCI Emerging Markets ETF is outperforming Schwab's ETF by more than 1% this year, Rosenbluth says, due to its larger exposure to South Korea.
"It is important for investors to understand that it is more than fees that matter," Rosenbluth said.
Additionally, the lower ETF fees often aren't big enough to warrant the hassle of adding a new ETF to a portfolio. SPDR Portfolio S&P 500 ETF is the lowest cost S&P 500 ETF with a fee of just 0.02%. But thanks to investors who already own Vanguard 500 ETF it "has swelled in size faster" despite charging 0.03% a year, Rosenbluth said.
Fees Rising?
If anything, many ETF providers are trying to find funds with a twist investors are willing to pay more for. That includes humans that pick the investments, rather than indexes, or for index-based ETFs that update their holdings more often.
"For example, JPMorgan Nasdaq Equity Premium Income has pulled in $7 billion this year and uses options to generate higher income," Rosenbluth said.
"I think while low fees are appealing to strategic investors, it is harder to compete in that space," he said. "We are increasingly seeing asset managers bring ETFs to market with higher fees because they seek to provide unique access or expertise."
ETF Expense Ratios Drop
Average fees on active and index stock ETFs
| Year | Active stock ETF fee | Index stock fee |
|---|---|---|
| 2016 | 0.88% | 0.22% |
| 2018 | 0.79% | 0.19% |
| 2020 | 0.70% | 0.18% |
| 2022 | 0.44% | 0.16% |
| 2024 | 0.44% | 0.14% |
