The fee war is not going to end.
In fact, Lydon said many ETF providers have tried to steer the conversation away from the "fee war" label, as fund sponsors race to one-up each other in slashing fund expense ratios, instead citing economies of scale as the main reason for lower costs.
And Lydon said that to an extent, economies of scale does provide a credible reason as the global ETF industry tops $3 trillion in assets. "Since the majority of ETFs are passive index-based products, it would make sense that these automated investment products may see costs lowered if fund companies garner enough assets under management to make it economically viable to sustain lower fees as a way to further develop their brands."
Vanguard, Schwab and iShares all offer commission-free trades on the respective brokerage platforms, which suggests that the main source of revenue from operating the ETFs comes through the expense ratios. But a fund provider may lower the fees to a point where, minus partnership fees, expense ratio–related revenue could be zero. This does not mean that operating an ETF may be unprofitable because of securities lending programs.
"It's about market share and competing aggressively, and they may make money on some ETFs and on others not," Britt said.
In some cases, that will be good for investors. But in others, the answer to the question of low fees benefiting investors is more complicated.
Britt conceded that a 2-basis-point difference over 25 years equals a cumulative 50 basis points of return, and "all else being equal, I want the 50 basis points. But all else isn't equal," he said.