How cheap can investing get?

THE BATTLE between the world’s two largest exchange-traded funds has reached a pivotal moment. On February 18 VOO, an ETF tracking the S&P 500 that is managed by Vanguard, a giant passive-investing firm, took the crown as the world’s largest. Days later SPY, an ETF managed by State Street Global Advisors, another giant, reclaimed it. Both funds boast assets of over US$620 billion.

For retail investors, exchange-traded funds, and the index-tracking investment they facilitate, are the greatest development in modern financial history. ETFs emerged in the 1990s and provide a way to circumvent expensive fund managers. Liquid and low-fee vehicles have saved investors trillions of dollars. SPY was America’s first ETF and charges fees on assets of just 0.09 per cent a year. VOO, which was set up in 2010, has undercut its rival with fees of 0.03 per cent.

While the Godzilla and King Kong of the ETF universe duke it out, offering ever lower fees, investors looking at more recent offerings have cause for concern. New American ETFs advertise fees just 0.2 percentage points below more expensive mutual funds, down from 0.7 percentage points in 2014, according to Morningstar, a data provider. And fees on new ETFs are rising, rather than falling, as had been the trend for decades. Most funds established in the past few years have fees of 0.5 per cent or higher.