Using ETF clones to save on fees

As pressure on fees continues across the financial services industry, financial advisers would be wise to never assume that there’s not a cheaper version of the same product.

Sometimes that can mean finding cheaper versions of the same index-tracking fund within the same fund family, as will soon be possible for three exchange-traded funds offered by State Street Global Advisors.

According to recent prospectus filings, SSGA is converting three index ETFs to turn them into cheaper versions of three existing index ETFs. This means savvy advisers will be able to save their clients some fees just by swapping out ticker symbols on any new allocations from clients who have been investing in the more expensive versions.

Starting Jan. 24, the plans call for cheaper but identical versions of the $306 billion SPDR S&P 500 (SPY), the $19 billion SPDR S&P Midcap 400 (MDY), and the $1.4 billion SPDR S&P 600 Small Cap (SLY).

The cheaper version of SPY, which tracks the S&P 500 and has an expense ratio of 9 basis points, will be SPDR Portfolio Large Cap (SPLG), a $3.5 billion ETF that charges 3 basis points.

SPLG currently tracks an index of 700 large-cap stocks, but it will start tracking the S&P 500 with the change.

The clone for MDY, which charges 24 basis points, will be SPDR Portfolio Midcap (SPMD), a $1.9 billion fund that charges 5 basis points.

And the clone for SLY, which charges 15 basis points, will be SPDR Portfolio SmallCap (SPSM), a $1.6 billion ETF charging 5 basis points.

SSGA is currently waiving two-thirds of SLY’s expense ratio to bring it in line with SPSM.

Matt Bartolini, head of SPDR Americas Research at SSGA, said the clone ETFs are designed for longer-term investors who might not be as concerned about the liquidity issues that could plague smaller funds.

He added that some large institutional investors and active traders will overlook higher fees on funds in exchange for their sizable options markets and liquidity profiles.

“Some investors also like the ability to be anonymous when executing larger block orders,” Mr. Bartolini said. “What we’re doing is providing products with a purpose. It’s more a function of providing choice to investors. You might hold SPLG for a strategic allocation and SPY in your liquidity sleeve.”

That’s probably a handy tip for multibillion-dollar institutional traders. But for most financial advisers, the cheaper version will work just fine.

In terms of tradability, it would be difficult to do better than SPY’s average daily trading volume of 47.8 million shares.

But at more than 708,000 shares, SPLG’s average dialing trading volume is plenty high for most financial advisory clients.

“Anything under 100,000 shares in a day is something an investor wants to be mindful of, as long as your trade size can easily get executed in a given day based on historical trading volume,” said Todd Rosenbluth, director of mutual fund and ETF research at CFRA.

“Tighter spreads are a byproduct of liquidity and trading volume,” he added.

There is some precedent for this kind of fund cloning.

In 2012, for example, BlackRock launched iShares Core MSCI Emerging Markets ETF (IEMG) as a 14-basis-point version of iShares MSCI Emerging Markets (EEM), which charges 68 basis points.

The original fund, which was launched in 2003, has $30 billion, while the newer, cheaper version has grown to $62 billion.

It’s a similar story for the $74 billion iShares MSCI Core EAFE ETF (IEFA), which was launched in 2012 as a clone to $64 billion iShares MSCI EAFE ETF (EFA), which has been around since 2001.

The upstart version charges 7 basis points, which compares to 32 basis points for the original version.

SSGA also has some experience in fund cloning.

In 2018 it launched SPDR Gold MiniShares Trust (GLDM) as a 10-basis-point version of the widely popular SPDR Gold Trust (GLD), which charges 40 basis points.

The original version, launched in 2004, manages more than $43 billion in a category known for trading, while the newer version is at $1.1 billion.

In addition to acknowledging the distinct investor appetites that clone funds often target, Mr. Rosenbluth said SSGA might also be playing some defense, at least when it comes to the S&P 500-tracker SPY.

While SPY is still the largest and most popular ETF tracking the S&P 500, it has been steadily losing market share to the $130 billion Vanguard S&P 500 ETF (VOO), which charges 3 basis points, and the $200 billion iShares Core S&P 500 ETF (IVV), which charges 4 basis points.

According to Mr. Rosenbluth, five years ago SPY had 69% of the market share of market-cap-weighted S&P 500 index ETF assets.

That share dropped to 55% two years ago, and to 48% at the end of 2019.

Related Topics: Exchange-traded products