Wall Street’s fee wars have entered the ‘silly stage’

Wall Street has never been under more pressure to reduce fees on popular index products that already come cheap.

Smaller asset managers think inexpensive offerings will help them get more customers in the door. Incumbents, meanwhile, see lower fees as a necessity to keep up with competitors, especially when certain products that track indexes are already very similar.

That’s why it came as little surprise to learn this week that beginning in July, fees on a new share class of BlackRock’s iShares S&P 500 Index Fund will drop from $4 for every $10,000 invested to $1.25, the lowest price for any BlackRock index mutual fund to date.

The offer is available only to those investors who cough up at least $2.5 billion, which means it’s effectively reserved for massive 401(k) platforms and wirehouses. A BlackRock spokesman made clear to the Wall Street Journal that the change was isolated to that one fund, and doesn’t apply to iShares ETFs more broadly.

But it’s another data point in a so-called “fee war” that’s pushing asset managers closer and closer to zero on some products, particularly those attached to well-known indexes like the S&P 500.

“At the end of the day, everyone wants to pay less for something that’s effectively the same across providers,” said Adam McCullough, a Morningstar passive strategies analyst.

For both big clients and everyday investors, the price of low-fee index products is only going down.

Last year, Fidelity launched four no-fee index mutual funds. Investors committed almost $4 billion through the end of February, according to a spokesperson.

Exchange-traded funds are heading to zero, too. JPMorgan last week launched the BetaBuilders US Equity ETF, which offers exposure to a diversified group of US equities and costs $2 for every $10,000 invested. Right now it’s the cheapest ETF on the market.

Fintech startup SoFi will claim that title later this month. The company is expected next week to begin offering two ETFs — the SoFi 500 ETF and the SoFi Next 500 ETF — that will waive fees entirely, at least for the first year.

“Asset managers offering low-cost exchange-traded funds and index mutual funds are scraping their backs on the floor in a game of fee limbo,” Morningstar analyst Ben Johnson wrote in a recent note.

For SoFi, at least, the play is clear. As a late entrant to the ETF market, the company wants to create buzz and attract new customers, especially ahead of a potential public offering.

But it’s not just a startup game. Generating publicity is a driver across the board, according to Johnson, Morningstar’s director of global ETF research.

Companies know it won’t make sense for most investors to move cash around for a few dollars saved here and there. Instead, the goal is to score headlines, gain new clients and then direct them toward other products that actually generate revenue.

“In some cases, like Fidelity’s zero-fee suite, these funds are clearly loss leaders, a cheap gallon of milk meant to entice consumers into the back of the store in hopes that they’ll grab some Cheetos and a pack of gum before they get to the counter,” Johnson said in his note, which was published last Friday.

There are some risks, according to Todd Rosenbluth, CFRA’s senior director of ETF and mutual fund research.

“It’s not profitable to offer a loss-leading product,” he said. “SoFi is not going to generate any direct revenue as a result of these products. Their presumed expectation is they can generate additional revenues outside of this.”

Yet fee hysteria will likely continue, at least in the near term. Funds tied to indexes are hugely popular, and for the companies that create them, it’s a crowded market.

How crowded, exactly? Investment company Salt Financial said recently that it may actually pay early investors to buy into its new ETF.

“This is the new level of where we are,” Rosenbluth said. “We’re in the silly stage.”