J.P. Morgan isn't going to zero fee, but it is about to launch the lowest-fee exchange-traded fund yet offering exposure to the U.S. stock market.
J.P. Morgan Asset Management announced Monday that the JPMorgan BetaBuilders U.S. Equity ETF will have a fee of 0.02 percent when it begins trading on Wednesday. That is notably one basis point lower than similar ETFs from BlackRock's iShares and Charles Schwab, which had been the lowest-fee offerings for broad US equity exposure, at 0.03 percent each. Vanguard Group's broad U.S. stock market ETF charges 0.04 percent.
Many ETF market experts thought J.P. Morgan might be the first to launch a zero-fee ETF — that distinction may go to millennial lender SoFi, which has filed for a no-fee US stock ETF — but the implications of the latest launch haven't changed.
Todd Rosenbluth, head of ETF and mutual fund research at CFRA, said the limited revenue generated by a zero-fee ETF would barely impact the financial institution's income statement, but he added that going to a new low of 2 basis points still highlights how deep-pocketed firms can be a later entrant and still succeed.
JP Morgan Beta Builders Japan (BBJP), a Japanese stock ETF, was one of the fastest ETFs to ever surpass $1 billion in assets.
"I'm glad that they did not make it 'free' even though they could have gotten more publicity," said Neena Mishra, director of ETF research at Zacks Investment Research. "Managing ETFs costs money and while costs could drop to zero with an increase in assets and a good securities lending program, a new fund with zero fee sounds more like a gimmick. Investors sometimes forget that 'free' is not actually free."
Questions about selling ETFs to its own clients
The bank has a big advantage in launching ETFs: its in-house network of clients across multiple businesses, including its private bank, to which it can market ETFs, especially as it pushes the fee war to new and lower levels. The rise of JP Morgan ETFs has resulted in questions about their use among the firm's own client base.
The Wall Street Journal reported on Monday that JPMorgan's ETFs raised $15.6 billion last year, most of it from J.P. Morgan affiliates. By the end of 2018, J.P. Morgan affiliates owned 53 percent of the firm's ETF assets, and the bank was the top shareholder of 23 of its ETFs. While other ETF providers also offer their own portfolios to captive client channels, including Charles Schwab, BlackRock and Vanguard, J.P. Morgan has by far the largest percent of ETF assets sold in-house. The WSJ found that no other top 10 ETF issuer came close to the scale of J.P. Morgan's captive asset generation.
Overall, the bank reported roughly $20 billion in assets under management within ETFs at year-end 2018. J.P. Morgan currently has over $23 billion in ETF assets, according to XTF.com data
While the data speak for themself, the Journal noted that there is not necessarily an issue, provided regulations are followed, conflicts are disclosed, and fees are low — with the last point being reflected in J.P. Morgan's past and current ETF launches.
10 biggest ETF companies
| Issuer | Assets |
|---|---|
| BlackRock | $1.5 trillion |
| Vanguard | $950 billion |
| State Street Global Advisors | $621 billion |
| Invesco | $188 billion |
| Charles Schwab | $133 billion |
| First Trust | $70 billion |
| WisdomTree | $39 billion |
| VanEck | $37 billion |
| ProShares | $31 billion |
| JPMorgan | $23.7 billion |
Source: FactSet, data as of February end
"They disclose that they own their own funds, so it's not a problem," Rosenbluth said. He added as one recent example that Northern Trust owns the FlexShares family of ETFs, which has a sizable percentage of its total assets through Northern Trust, so the J.P. Morgan approach to growing the business is not unique.
Last August, J.P. Morgan announced it was launching its first personal investing app, with all customers getting 100 free stock or ETF trades in the first year and those with Chase Private Client receiving unlimited trades. J.P. Morgan is estimated to have financial ties with half of American households, and more than 47 million people already using its banking app or website.
Mishra said since JP Morgan did not have a significant presence in the ETF industry it is not surprising that they chose the route of launching cheaper products and moving their client assets to gain market share.
"There is nothing wrong in launching cheap products and then moving their client assets from competitors' ETFs that provide similar exposure at a higher cost. But of course, there could be conflicts that investors need to be aware of. As long as investors understand what they are buying, they are fine," Mishra said.
The ETF industry has become increasingly crowded and ultra-competitive and it's not easy for a new ETF to gather assets. Mishra noted there has been a surge in ETF closures of late, as many new ETFs fail to reach scale required to survive. Over 30 ETFs have closed this year already, and in 2018, 186 funds closed — 83 within the last two weeks of December, according to Morningstar data.
Investors should not choose on fees alone
"J.P. Morgan has successfully penetrated the competitive ETF market due to a focus on low-cost products," Rosenbluth said. "Recent success has been with BBJP and JPST that are relatively cheap, but by providing diversified US equity exposure for just 2 basis points, the pending ETF is likely to gather assets as many investors screen based on expense ratio and unfortunately stop there."
That's an important point, as investors should not stop at fees when choosing funds. Differences in the underlying indexes used by the ETFs can lead to performance variation, as can liquidity and trading costs. For long-term investors, it is the underlying index methodology that defines the ETFs' investable universe and the expense ratio that matter the most. Other costs associated with trading ETFs — including bid/ask spreads, premiums/discounts and trading commissions — are more important to active traders than buy-and-hold investors.
Ben Johnson, director of global ETF and passive strategies research at Morningstar, noted in a tweet on Tuesday that the cost savings for an investor putting $10,000 into an ETF that is 1 basis point lower than its cheapest competitor would equal $1 a year.
Nevertheless, all signs point to the fact that investors are choosing on fees, and nothing but that. In the past two weeks alone, there have been fee reductions and new low-fee ETF introductions from the firms already offering the lowest-fee funds, including Vanguard, Schwab and iShares, as rounded up by Nate Geraci, who runs the ETF Educator blog.
"J.P. Morgan's fund will be slightly cheaper than ITOT, VTI and SCHB, but as those funds' performance records show it is more than fees that drive performance," Rosenbluth said.
Rosenbluth was referring to iShares Core S&P Total U.S. Stock Market ETF (ITOT); Schwab U.S. Broad Market ETF (SCHB); and Vanguard Total Stock Market EF (VTI).
The U.S. stock ETF offers exposure to large and mid-cap U.S. stocks, tracking the Morningstar US Target Market Exposure Index. Vanguard's VTI covers large-, mid-, and small-cap stocks, while Schwab's SCHB targets large- and small-cap stocks.
In the launch this week, J.P. Morgan is making more of a push for entire U.S. market coverage, also launching the JPMorgan BetaBuilders 1-5 Year U.S. Aggregate Bond ETF, at a fee of 5 basis points. JP Morgan already offers a U.S. Aggregate Bond ETF (JAGG) at a fee of 7 basis points.
The new JP Morgan bond ETF tracks the Bloomberg Barclays Short-Term U.S. Aggregate Bond Index and there are other bond ETFs that offer shorter-term exposure, such as the Vanguard Short-term Corporate Bond ETF (VCSH), which has been the third most-popular ETF this year, taking in over $3 billion from investors, and has an expense ratio of 7 basis points. The aggregate bond funds, though, have large weightings to government bonds as well as corporates. Vanguard also offers a Short Term Bond ETF (BSV), which is a $50 billion ETF and follows the Barclays 1-5 year aggregate bond index, and charges a fee of 7 basis points.
The new bond ETF still leaves Schwab as the lowest-fee option in bonds, at 4 basis points, on its Schwab U.S. Aggregate Bond ETF (SCHZ). The iShares Core U.S. Aggregate Bond Index ETF (AGG) and Vanguard Total Bond ETF (BND) have a fee of 5 basis points, matching the new J.P. Morgan fixed-income ETF.
This story has been updated to include recent news on fee reductions and new low-fee funds throughout the ETF industry, and comment from Morningstar official on the cost savings from the new JP Morgan ETF.