State Street Just Gave ETF Investors a Big Discount

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One of the hallmarks of exchange-traded funds is their relatively low expense ratios — and the expenses on ETFs just keep getting lower.

XLY consumer discretionary SPDRThe three biggest ETF issuers — State Street Corporation (NYSE:STT), BlackRock Inc. (NYSE:BLK) and Vanguard — have continued use their market positions and massive assets under management to drive down those expenses to near free-to-own levels.

The so-called ETF “fee war” is a very real thing, and the latest salvo comes from a huge effort by State Street, which is trying to regain its position among the top three.

The real winner from State Street’s latest price cuts? You — even if you’re not invested in any SPDR funds! You see, expenses from the bread ‘n’ butter index ETFs should fall across the board as a result.

State Street Cuts Deep

State Street — home to the first and still largest ETF, the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) — has found itself losing position among the big three, and most of that comes down to cost. State Street’s SPDR ETFs often are the most expensive compared to rival sponsored funds tracking the same or similar indices.

State Street has conceded the No. 2 spot to rival Vanguard  in terms of ETF assets under management. According to ETF.com’s league tables, STT has nearly $436 billion in ETF assets, while BlackRock has $779 billion and Vanguard now holds $445 billion.

To counter that, STT has fought back with one of its largest and deepest expense ratio cuts in recent history.

At the beginning of the month, State Street took the management fees on 41 of its SPDR-branded ETFs to the wood chipper. This will affect a wide range of funds, from traditional domestic and international equity and bond index funds to smart beta and factor investing products. On average, fees were cut by 50%!

James Ross, global chief of SPDR ETFs, told Reuters, “Competitive pricing is a core benefit to the SPDR ETF value proposition.” And yes, State Street’s ETFs are certainly more of a value now that they’re cheaper.

For example, State Street’s SPDR Barclays Aggregate Bond ETF (NYSEARCA:LAG) now has an expense ratio of 0.1%, or $10 per $10,000 invested — down from 0.21%. Its SPDR S&P 600 Small Cap ETF (NYSEARCA:SLY) now only costs 0.15% vs. 0.2%.

That’s great news if you already owned LAG or SLY. However, it still isn’t enough to win the war. The iShares Core U.S. Aggregate Bond ETF (NYSEARCA:AGG) and iShares Core S&P Small-Cap ETF (NYSEARCA:IJR) — which track the same indices as LAG & SLY — charge 0.08% and 0.12%, respectively. They still are cheaper even after State Street’s cut. Not to mention they feature more robust trading volumes and tighter bid/ask spreads.

In addition, none of State Street’s biggest and most popular ETF offerings — like the SPY, Select Sector SPDR’s or SPDR Gold Trust (ETF) (NYSEARCA:GLD) — were included in the fee cut.

A Big Win for Investors

At the end of the day, State Street had to cut the fees on its funds. Both Vanguard and BlackRock continue to see massive inflows into their funds as both institutional and retail investors flock to lower-cost options. Both types of investors have realized the power of indexing and have begun abandoning active management strategies in favor of these passive options.

Given that State Street has traditionally been a custodial bank for larger institutional funds, being the most expensive of the larger players isn’t exactly a great position to be in.

Even more so when both Vanguard and BlackRock’s iShares are still playing hardball.

Recently, iShares announced plans for several new ETFs, from multifactor funds to convertible bonds. And all of them are direct shots at State Street and things that the ETF sponsor has done well. Naturally, iShares is undercutting on fees on these funds. Meanwhile, Vanguard continues to lower the expenses for its broad-based core ETFs as well as its sector funds.

But State Street’s pain could be your gain.

As the three firms battle it out, portfolios are getting cheaper to compile, and that will only help returns over time. The less you pay to management — and thus the more you keep — add up as returns compile over time. Ultimately, State Street’s cuts will put pressure on the other fund majors, and you’ll see more cuts as time goes on.

Eventually, I think you’ll even see a true free-to-own ETF.

In the meantime, if you own any State Street ETFs, enjoy the break on expenses. And don’t expect it to be the last.

As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.

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Aaron Levitt is an investment journalist living in Ohio. With nearly two decades of experience, his work appears in several high-profile publications in both print and on the web. Also likes a good Reuben sandwich. Follow his picks and pans on Twitter at @AaronLevitt.


Article printed from InvestorPlace Media, https://investorplace.com/2015/02/state-street-spdr-etfs-fee-cut/.

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