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As new money rushes into ETFs, a price war breaks out among managers

  • U.S.-based exchange-traded funds have $3.2 trillion of assets, an increase of 11 percent this year.
  • The biggest worry for the industry is a continuing price war that is threatening profits. Talk of industry consolidation among the 70 or so providers is already in the air.
  • In the biggest year ever for ETFs, the giant SPY has lost assets and its cheaper competitors have gained assets.

The ocean of money keeps flowing into exchange-traded funds. October notched another record month, adding $56 billion to this year's total of $388 billion in new money, far and away the biggest year ever, even after just 10 months.

U.S.-based ETFs now have $3.2 trillion in assets under management, an increase of 11 percent this year. This is a long way from the roughly $16 trillion in U.S. mutual funds, but don't kid yourself. Mutual-fund flows are negative, while flows into ETFs are positive.

Where's all the money going? The flows have been fairly consistent. It's U.S. equity funds, international equity and a smattering of fixed income.

October ETF flows
(% of inflows)

U.S. equity 54 percent
International equity 26 percent
US fixed income 15 percent
Other 5 percent

Source: ETF.com

The money is going into funds that track the biggest market indexes, including the S&P 500 (SPDR S&P 500 ETF, iShares Core S&P 500, Vanguard S&P 500), the Russell 2000 (iShares Russell 2000), Europe (iShares Core MSCI EAFE), and emerging markets (iShares Core MSCI Emerging Markets).

Bonds aren't entirely left out. With some corporate bond yields near 3 percent, the iShares Investment Grade Corporate ETF (LQD) has seen its assets increase 27 percent this year, to over $10 billion.

ETFs
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The biggest worry for the industry is a continuing price war that is threatening profits. Talk of industry consolidation among the 70 or so providers is already in the air.

You can see it in the fund flows. It's pretty cheap to own the S&P 500 these days. The biggest ETF in the world, the SPDR S&P 500 ETF (SPY), will cost you a measly 9 basis points — that's $9 a year for every $10,000 you own.

But the competitors have slashed prices: The iShares Core S&P 500 (IVV) and the Vanguard S&P 500 (VOO), virtually the same products, charge only 4 basis points. That's $4 for every $10,000 you own.

That makes them $5 a year cheaper than SPY.

You would think, who's going to switch investments over just $5 a year? As it turns out, a lot of people.

In the biggest year ever for ETFs, the SPY has lost assets and its cheaper competitors have gained assets:

S&P 500 ETFs
(2017 net flows)

SPDR S&P 500 $3.7 billion outflow
iShares Core S&P 500 $26.9 billion inflow
Vanguard S&P 500 $12 billion inflow

Source: ETF.com

This is true with other products.

How much longer this can go on is the hot topic in the industry. How much money can you make, how many people can you support, when there is a race to the bottom on fees? The good news is the industry is raking in new cash, which is helping revenue.

But there are now nearly 2,000 ETFs and some 70 ETF providers. Eventually, there will be consolidation.