As the ETF world continues to grow, issuers have spread out into a variety of market segments in order to obtain the coveted first-mover advantage and gain large asset bases. Yet with the rapid proliferation of the industry, many are beginning to circle back to some of the most popular market segments such as bonds, broad stock funds, or emerging market equities in order to chip away at market leaders and establish new products in these sought after spaces. While a number of new funds have sought to offer more segmented exposure, a few have focused in on price as a key way to differentiate themselves from their entrenched competitors. This has pushed many ETF issuers into a full blown price war, a development that is obviously beneficial to investors’ bottom lines. The most well-known example of this trend is arguably in the Emerging Markets ETFdb Category where the two most popular funds, the Vanguard Emerging Markets ETF (VWO) and the iShares MSCI Emerging Market Index Fund (EEM) compete for investors assets. Both funds track the MSCI Emerging Markets Index but have wildly divergent expense ratios; EEM charges investors 69 basis points for its services while VWO charges just 27 bps in comparison. Despite this incredible difference in prices for two funds tracking the exact same index, EEM has always held a huge lead on VWO in terms of assets under management, although this gap has shrunk in recent months as investors have piled into cheaper securities across the board. Finally, late last week, VWO surpassed EEM for total AUM although both still have more than $45 billion in assets and rank in the top five for most widely held funds in the industry [see the list of the 25 most popular ETFs here].
This toppling of one of the giants in the ETF world from arguably the most famous ETF issuer underscores just how important prices are to investors and could finally make for a wake up call in which other issuers lower their prices on comparable funds in order to compete with more well-known competitors. Below we profile some of the other major battles between funds that are substantially identical but vary on one important factor; expense ratios. While not as famous as the VWO/EEM battle, these products could also be ripe for a similar situation in the coming months as new investors increasingly flock towards low cost options [also read the Race For The Cheapest ETF].
- Gold Bullion: Currently, there are four different ETFs offering exposure to physical gold bullion although the SPDR Gold Shares Fund (GLD) accounts for the vast majority of assets in the space. From a cost perspective, GLD charges investors 40 basis points in fees compared to 39 basis points for ETF Securities’ AGOL and SGOL and an even cheaper 25 basis points for the iShares COMEX Gold Trust Fund (IAU). Although both GLD and IAU track the same precious metal holding it securely in vaults, GLD holds nearly 10 times as many assets as its iShares counterpart [see Precious Metal ETFs: Physical vs. Equity Exposure].
- EAFE Exposure: Both VEA and EFA track the MSCI EAFE Index which measures the performance of equity markets in European, Australiasian and Far Eastern markets. Currently, iShares’ product has a substantial lead in terms of AUM over its Vanguard counterpart, but that could soon change given the wide disparity in expense ratios. EFA currently charges investors almost twice as much in fees as does VEA; 0.35% to 0.16%.
- S&P MidCap 400 Index: Arguably, the most ripe for a shift towards lower costing products, two funds are currently neck-and-neck in the space, the iShares S&P MidCap 400 Index Fund (IJH) and the SPDR MidCap Trust Series I Fund (MDY). Both funds track S&P MidCap 400 Index which measures the performance of the mid capitalization sector of the U.S. equity market and currently MDY is leading the battle for total AUM. However, iShares’ product currently charges investors just 20 basis points compared to 25 for the State Street fund, suggesting that from a cost perspective, the two billion dollar gap between IJH and MDY could be poised to erode significantly by the time 2011 is over [see Ten ETFs Every Advisor Should Know But Most Have Never Heard Of].
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Eric is long VWO, IAU, gold bullion