Fee war redux? State Street ETFs undercut iShares and Vanguard

Russell 1000, 2000 and 3000 funds cheapest on the market
JUL 11, 2013
State Street Global Advisors, the second-largest provider of exchange-traded funds, is making a push to join the ranks of low-cost ETF providers by offering the cheapest Russell 1000, 2000, and 3000 ETFs on the market. SSgA launched the SPDR Russell 2000 ETF (TWOK) on Tuesday and changed the underlying index of the $38 million SPDR Dow Jones Large Cap ETF (ELR) and the $510 million SPDR Dow Jones Total Market ETF (ELR) to the Russell 1000 and Russell 3000, respectively. The SPDR Russell 2000 ETF will have an expense ratio of 12 basis points. The iShares Russell 2000 ETF (IWM) and the Vanguard Russell 2000 ETF (VTWO) charge 28 and 21 basis points, respectively. SSgA, which has $328 billion in ETF assets, also slashed the expense ratios of the latter two ETFs to 10 basis points, from 20, undercutting similar ETFs from BlackRock Inc.'s iShares unit and The Vanguard Group Inc. by five and two basis points on the Russell 1000 and 11 and five basis points on the Russell 3000. “Those are significant cuts,” said Mike Rawson, a fund analyst at Morningstar Inc. “It looks like they're trying to be more competitive in the core buckets.” One issue that the ETFs will have, at least initially, is their lack of liquidity, Mr. Rawson said. But Jim Ross, global head of SPDR ETFs at SSgA, said: "We expect them to compete well for liquidity over time." The iShares Russell 3000 ETF (IWV) trades about 338,000 shares a day, for example, while the newly christened SPDR Russell 3000 ETF has an average trading volume of just 5,000 shares a day. The iShares Russell 2000 is the fifth-most-traded ETF in the world, with an average daily volume of about 39 million shares per day, according to Morningstar. Given that lack of liquidity, the new ETFs may not be that much cheaper when the total cost, which includes transactions, is considered. Then again, given the popularity, or lack thereof, of the existing ETFs, it may be worth it for SSgA to shake things up, Mr. Rawson said. “The ETFs they switched didn't have significant assets, so maybe they figured they have nothing to lose,” he said. Mr. Ross, however, sees it as an opportunity for SSgA "to bring institutional-grade products to the marketplace." The move follows the broader ETF industry trend of cutting costs to attract investors away from Vanguard, which has been gaining market share rapidly, thanks in large part to its focus on costs. SSgA's market share had declined to 22.3% at the end of last month, down from 30% at the beginning of 2009, according to Morningstar. Vanguard's market share has meanwhile grown to 19.3%, from 8.5% in 2009. BlackRock, the largest ETF provider with $575 billion in ETF assets, launched a series of low-cost broad-based ETFs in October. The Charles Schwab Corp. in September cut the fees on its ETFs, which all fall in the core holdings categories, to make them the cheapest available. Then there is Vanguard, which offers its ETFs at cost to investors, and cuts ETF expense ratios seemingly on a regular basis. In its last fiscal year, it cut costs on 56 of its 65 ETFs.

Price choppers

Former ETF Name New ETF Name Former ETF Expense Ratio New ETF Expense Ratio
N/A SPDR Russell 2000 ETF (TWOK) N/A 12 bps
       
SPDR Dow Jones Total Market ETF (TMW) SPDR Russell 3000 ETF (THRK) 20 bps 10 bps
       
SPDR Dow Jones Large Cap ETF (ELR) SPDR Russell 1000 ETF (ONEK) 20 bps 10 bps
       
Source: State Street

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