ETF Price Cuts: NAGS, EPI Slash Fees

by on August 3, 2011 | ETFs Mentioned:

Continuing a trend that has been playing out over the last couple years, two more issuers announced reductions to expense structures over the past few days. Teucrium, the company behind three resource-specific commodity products, announced the introduction of an expense cap on its natural gas ETF, while WisdomTree cut fees on one of its most popular emerging markets funds.

Capping NAGS

In a recent SEC filing, Teucrium announced that it is voluntarily capping the management fees and expenses of the Teucrium Natural Gas Fund (NAGS) at 1.5% of assets. The change was effective on Monday, and the filing indicated that the cap could be terminated with at least 90 days notice.

The fee reduction comes as NAGS attempts to gain a bigger share of the nearly $2 billion invested in natural gas ETFs and ETNs. By far the largest fund offering exposure to natural gas is the United States Natural Gas Fund (UNG), which has about $1.6 billion under management. iPath offers multiple natural gas ETNs, including the Dow Jones UBS Natural Gas ETN (GAZ) and Seasonal Natural Gas ETN (DCNG).

Because NAGS is a relatively small product–the fund has only about $2 million in assets–expenses and trading fees have taken a sizable bite out of an otherwise impressive return. With Teucrium now covering a significant chunk of trading fees, the comparison of returns and volatility across various natural gas ETPs should more closely isolate the results of the roll strategies and exposure profiles, as opposed to differences in the dispersion of fees related to the size of the funds [25 Lowest Expense Ratio ETFs].

Unlike UNG, NAGS spreads exposure to natural gas futures contracts across multiple maturities; the fund allocates 25% of its portfolio to each of 1) nearest-to-spot March, 2) nearest-to-spot April, 3) nearest-to-spot October, and 4) nearest-to-spot November. That approach is constructed with the goal of minimizing the cost of “rolling” exposure on a monthly basis. Though there are some physically-backed precious metals ETFs, most commodity funds achieve exposure to the underlying resources through futures contracts. In order to avoid taking possession of the underlying assets (i.e., natural gas), expiring contracts must be sold and the proceeds used to purchase longer-dated futures. When markets are contangoed the roll process can erode returns, creating a gap between fund performance and the hypothetical yield on an investment in the spot commodity [see Talking Commodity ETFs and Contango With Sal Gilbertie].

EPI Drops To 0.83%

Teucrium wasn’t the only issuer to lower fees last week; WisdomTree has reduced the expense ratio on its popular India Earnings Fund (EPI) from 0.88% to 0.83%. EPI seeks to replicate the WisdomTree India Earnings Index, a fundamentally-weighted benchmark that includes profitable Indian companies eligible to be purchased by international investors. With about $1.3 billion in assets under management, EPI is by far the most popular India ETF available to U.S. investors [Are Investors Embracing Low Cost ETFs?].

After the price cut, EPI is now the second cheapest India ETF, trailing only the PowerShares India Portfolio (PIN, 0.78%).

Price Wars Continue

Much of the tremendous increase in ETF assets over the last several years is attributable to the cost efficiency of the exchange-traded structure relative to traditional active mutual funds. But competition within the ETF industry has placed additional downward pressure on fees in recent years; many issuers have cut expenses in an attempt to lure cost-conscious investors–often with huge success. iShares’ IAU highlights the impact a price cut can have; since the company lowered fees on the physically-backed gold ETF from 0.40% to 0.25% last year, IAU has gradually gained ground on its much larger competitor, GLD. Through the first seven months of 2011, IAU took in about $1.9 billion in inflows–nearly $1 billion more than the Gold SPDR.

Though the last several months haven’t seen high profile fee reductions such as the cut to IAU, issuers have continued to lower bottom line fees as asset bases grow and economies of scale are realized. In addition to WisdomTree and Teucrium, Charles Schwab, iShares, Van Eck, and Vanguard have all reduced expenses on at least one ETF over the last two years [Complete List Of Cheapest ETFs].

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Disclosure: No positions at time of writing.