- ETF issuers raised their fees in 2023, reversing a decade-long trend of fee-cutting wars
- The shift towards active investment strategies and mutual-fund-to-ETF conversions are driving up fees
- Investors favor cheaper products, but switching funds may come with costs
- The trend of surging ETF fees is expected to continue over the next few years
After a decade of relentless fee-cutting wars, ETF issuers surprised investors in 2023 by raising their fees. This marked a significant shift in the industry, as more ETFs increased their fees than decreased them for the first time since 2009. The fee hikes come as the landscape of the ETF market evolves beyond cheap index-tracking funds. In this edition of ETF Wrap, we delve into the reasons behind the industry-wide fee increases and explore what it means for ETF investors who continue to favor cheaper offerings.
Factors Driving the Fee Hikes
ETF strategists point to two main factors driving the fee hikes: the shift towards active investment strategies and the rise of mutual-fund-to-ETF conversions. Active strategies, such as actively-managed or factor-based ETFs, often come with higher fees as they aim to generate above-market performance for investors. Additionally, the conversion of mutual funds into ETFs has led to increased fees, as mutual funds typically have a more expensive distribution model compared to ETFs.
Investor Response and Considerations
Investors have taken notice of the rising fees. In 2023, the ETF flows gap, which measures the difference between expected and actual flows, showed that investors held back on capital allocation to funds that raised their fees, while they accelerated investments in funds that cut costs for investors. However, switching funds may come with its own costs, and in some cases, the increase in fees may not outweigh the benefits of switching to a lower-cost option. This consideration may explain why some investors have chosen to stick with higher-fee ETFs.
Future Outlook for ETF Fees
According to industry experts, the trend of surging ETF fees is expected to continue over the next few years. The increased adoption of actively-managed and alternative ETFs, which typically charge higher fees, is driving this forecast. As a result, the average fees paid by investors across all ETFs may tick up. However, it is worth noting that certain niche ETF providers with limited competition may still have pricing power and flexibility with their fees, as investors may have limited alternatives.
The ETF industry’s fee-cutting wars have come to an end as issuers raised their fees in 2023. The shift towards active strategies and mutual-fund-to-ETF conversions has led to higher fees for investors. While investors still favor cheaper products, the costs of switching funds and limited alternatives may deter them from doing so. ETF strategists predict that the trend of surging fees will continue in the coming years, driven by the adoption of actively-managed and alternative ETFs. As the ETF landscape evolves, investors will need to carefully consider the fees associated with their chosen funds.