"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.
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