The landscape for cost-effective investing is at a fascinating crossroads. A fierce battle for supremacy between the world's two largest exchange-traded funds (ETFs) has reached a critical juncture, raising a pivotal question for millions of retail investors: just how cheap can investing get?
The Titans Clash: A $620 Billion Crown
In a dramatic shift in February, Vanguard's VOO, an ETF tracking the S&P 500, briefly seized the title of the world's largest ETF. However, its rival, State Street Global Advisors' SPY, swiftly reclaimed the crown days later. This tug-of-war highlights the intense competition in the passive investing arena. Both financial behemoths now oversee assets exceeding a staggering $620 billion each.
For the everyday investor, ETFs have been nothing short of revolutionary. Emerging in the 1990s, these liquid, low-fee vehicles bypassed expensive fund managers, saving investors trillions. SPY, America's pioneering ETF, charges an annual fee of just 0.09%. VOO, launched later in 2010, undercut this significantly with a fee of 0.03%.
A Two-Tier Market: Vanilla vs. Zany Flavours
While these giants duel, offering ever-lower fees, a concerning trend is emerging for newer funds. Data from Morningstar indicates that the fee gap between new ETFs and mutual funds has shrunk from 0.7 percentage points in 2014 to just 0.2 points. Contrary to the decades-long trend, fees on new ETFs are actually rising, with many launched in recent years charging 0.5% or higher.
The reason for this divergence is a fundamental shift in the types of ETFs being created. While traditional funds track broad indices like the S&P 500, newer entrants are often more complex:
- Thematic ETFs focusing on trends like ESG (environmental, social, and governance) or specific stock characteristics.
- Actively managed ETFs that deviate from passive index tracking.
- More speculative products like leveraged or single-stock ETFs (e.g., a triple-leveraged bet on Nvidia).
This complexity comes at a cost. Heavily leveraged funds and those chasing fads are often poor choices for long-term investors, even before considering their elevated fees. Some semi-transparent vehicles with high fees stretch the original low-cost logic of an ETF to its breaking point.
The Future of Fees: Scale vs. Speculation
So, is the era of falling costs over? The answer hinges entirely on investor choice. The economies of scale are undeniable. The largest 15 equity ETFs hold a colossal $3.9 trillion in assets—more than the next 100 combined. This massive scale allows them to spread fixed costs for trading, legal, and regulatory matters thinly, enabling ultra-low fees. In fact, Citigroup analysts suggest half of all US ETFs likely lose money for their issuers due to insufficient size.
The industry exhibits a strange symbiosis. On February 1st, Vanguard, the undisputed champion of low fees, cut expenses on 87 funds, reducing its average fee from 0.08% to 0.07%. Its $10 trillion in assets under management allows such aggressive pricing. This creates a powerful dynamic: when investors park the core of their portfolio in these cheap, diversified funds, they lower their overall expense ratio. This, in turn, can free up room for riskier, pricier bets if they choose to speculate.
The conclusion is clear: if average ETF fees plateau, it won't be because the limits of cost reduction have been reached. It will signal that a growing number of investors are voluntarily opting for more exotic, expensive products. For those who stick to straightforward, 'vanilla' index funds, the potential for trillions in savings remains very much alive. The power to keep costs down ultimately rests in the hands of investors themselves.
