State Street cuts ETF fees, ramping up race to zero

The race to the bottom continues as two of the largest ETF issuers slice what investors pay in the $6 trillion industry’s battle to manage the most cash.

Just a day after BlackRock Inc. announced Wednesday that it was cutting fees on $7.6 billion of its style exchange-traded funds, competitor State Street Global Advisors slashed them on two of its bond funds.

Although the fight over fees in ETFs has raged for years, it’s rare for two powerhouses to make these kinds of moves in such rapid succession. That asset managers have to continually reduce what they charge their customers highlights how difficult it is to attract assets with more than 2,350 products trading in the U.S. -- especially for State Street, which has lost market share in every year since 2016.

“High yield has become the next battle in the decade-long fee war,” Todd Rosenbluth, director of ETF research for CFRA Research, said. “State Street has lagged behind iShares and DWS for more retail-oriented high-yield assets, but has lowered the bar and is better positioned to gather new money.”

State Street cut fees on the SPDR Portfolio Mortgage Backed Bond ETF (SPMB) to 0.04% from 0.06%, and lowered the SPDR Portfolio High Yield Bond ETF (SPHY) to 0.10% from 0.15%, according to a statement Wednesday.

That makes SPHY cheaper than its larger peers, BlackRock’s iShares Broad USD High Yield Corporate Bond ETF (USHY) and DWS Group’s Xtrackers USD High Yield Corporate Bond ETF (HYLB), both of which charge 0.15%. And it appears to be a bid to boost SPHY’s assets, which currently sit at $288 million, compared with $7.5 billion for USHY and $6.5 billion for HYLB.

The move by State Street came after BlackRock earlier this week reduced fees on nine iShares Morningstar U.S. Equity Style Box ETFs to a range of 0.03% to 0.06%, down from 0.25% to 0.30%. BlackRock spokeswoman Soogyung Jordan said she didn’t know whether these cuts triggered State Street’s decision.

“We are always and continually reviewing our product offerings and look to be responsive to the needs of our investors,” Jordan said.

Last summer, BlackRock also lowered the cost of its largest ETF, the iShares Core S&P 500 ETF (IVV) to 0.03%, matching the fees charged by a rival product from Vanguard Group. BlackRock, Vanguard and State Street have long held the lion’s share of ETF assets. Now, BlackRock and Vanguard are fighting for the top spot, with Vanguard capturing the most inflows last year for the first time since 2013. BlackRock currently controls 36.7% of U.S. ETF assets -- about $2.1 trillion -- compared with Vanguard’s 28.5%.

Meanwhile, State Street continues to lose market share, following a $26 billion departure last year from its largest fund, the $341 billion SPDR S&P 500 ETF Trust (SPY). The firm now manages 15.4% of ETF assets, down from 22% in 2014.

“In recent years, there’s no question costs have become an increasingly important aspect of investor due diligence, and we’ve responded by reducing expenses ratios where possible,” said Noel Archard, global head of SPDR product at State Street.

Next up in the fee war could be the increasingly popular thematic sector, according to David Perlman, an ETF strategist at UBS Global Wealth Management. Such funds have ballooned to $167 billion in assets, up from just $43 billion a year ago.

“While these recent reductions are in more plain-vanilla ETFs, I think you’ll continue to see the fee pressure on the thematic and active side as well,” Perlman said.

[More: Vanguard jumps on the ETF share-split bandwagon]