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Paper Examines Stagnation in ETF Fees

A recent paper titled The Dynamics of ETF Fees highlighted by the CFA Institute examines how ETF fees have evolved -- or remained the same -- over the past 15 years. ETFs continue to hold broad investor appeal partly for their lower costs. InvestmentNewsreported recently that 73% of registered advisers anticipate their allocation to ETFs will continue to increase in 2020. However, the paper’s authors find that the average expense ratios of ETFs have remained relatively steady between 2004 and 2018 and that despite the thousands of new funds, “the arrival of most ETF sponsors into a narrowly defined area has not generally led to lower fees for competing funds.” The authors caution that as objectives for newer ETFs become increasingly specialized, investors must consider whether the benefits of targeted strategies justify their higher prices. The authors attribute recent fee stagnation to a few factors. They note that newer ETF offerings often hold more specialized portfolios than the older funds. “The fees for these more complex funds may be higher because they are actively managed, are constructed as funds of funds, follow an “enhanced” index, use leverage, or track the inverse of their benchmarks.” The authors also assert that investors may have become more willing to pay the higher fees of specialized strategies because they believe that these ETFs provide better opportunities for superior performance. The authors also contend that newer ETFs may simply be charging higher fees than their predecessors.

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