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Cost Tops ETF Selection Criteria for the First Time

By Thomas Coyle December 4, 2017

For the first time, expense ratio tops the list of considerations that go into ETF selection for financial advisors and institutional investors, according to a report by Brown Brothers Harriman and ETF.com.

Sixty-four percent of the 360 FAs and institutional investors polled considered expense ratio as "very important" when selecting ETFs, ahead of the nine other factors evaluated for importance. In surveys for 2016 and 2014, expense ratio ranked as the second most important factor in ETF selection. In 2013, it took the third spot.

The fact that expense ratio this year topped other key considerations such as index methodology, historic performance and tax efficiency “reflects a continuation of the trend toward low-cost investing that has been underway for some time,” Shawn McNinch, ETF services chief at Brown Brothers, says in a press release.

Meanwhile, the primacy of cost as a factor in ETF selection “makes sense” to ETF.com’s Dave Nadig “when you look at both the asset flows, and the growing ETF fee war.”

Volleys in this war have been frequent and loud. Deutsche Bank recently trimmed fees on a high-yield corporate bond to 20 basis points — half what rivals BlackRock and State Street were charging. Franklin Templeton levies an industry-beating nine basis points for a new clutch of developed-economy trackers. And in October State Street responded to pressure from BlackRock and Vanguard by cutting ETF fees — in some cases to just three basis points.

Even before this past year’s aggressive price gouging, expense ratios for U.S. equity funds had on average declined from around $1 for every $100 invested in 2000 to 63 cents in 2016, according to the Financial Times.

But it seems the ETF market is terrain worth fighting for. The global value of ETFs has gone from less than $500 billion in 2005 to over $5 trillion now, according to the research firm ETFGI.

Shawn McNinch

Expense ratios aren’t the only aspect of ETF selection highlighted by the Brown Brothers and ETF.com survey. It also points to the growing popularity of environmental, social and governance ETFs, with 51% of gatekeepers this year finding ESG at least “somewhat important” compared to 37% last year.

As for what’s apt to float ETF investors’ boats in 2018, Nadig says “respondents made it clear that they are interested in moving beyond the plain vanilla, into alternatives, international equities and even actively-managed ETFs.”