By Michael Wursthorn
The race to zero on Wall Street is so competitive that some of
the biggest asset managers are creating cheaper knockoffs of their
most popular exchange-traded funds.
Invesco Ltd. was the latest firm to create a copycat of one of
its own ETFs. Earlier this month, it launched the Invesco Nasdaq
100 ETF, a near carbon copy of the biggest tech-focused ETF in the
world, the Invesco QQQ Trust, better known as the Qs for its QQQ
ticker symbol. Both funds track an index of the 100 biggest Nasdaq
stocks, a corner of the stock market that has massively
outperformed in recent years.
But there is one glaring difference between the ETFs: fees.
QQQ charges investors 0.2%, meaning for every $1,000 investors
put into the ETF they pay $2 in annual fees. The copycat, which
goes by the ticker symbol QQQM, charges 0.15%, and shares cost half
as much.
The move would have been unthinkable a decade ago. Asset
managers risk cannibalizing their most popular products by
redirecting assets into other funds, analysts said. But Invesco and
other executives in the ETF industry say the copycat ETFs are
necessary to compete with rivals that are all seeking the attention
-- and cash -- of cost-conscious individual investors.
There are more than 2,200 exchange-traded products listed on
major U.S. exchanges, but the cheapest products tracking broad
swaths of the stock market have attracted the lion's share of
investors' cash. In a recent report, Morningstar found that
investors last year put $581 billion in the cheapest 20% of ETFs
and mutual funds, while the rest saw $224 billion in outflows.
And analysts say the trend is continuing to play out.
Asset managers have noted the preference, sparking a fee war
that has dramatically reshaped how much investors pay for
investment products.
Rivals BlackRock Inc., Vanguard Group, State Street Corp.,
Invesco and others have all slashed fees on some of their most
popular products. The fee war has ultimately saved investors some
$388 million this year compared with what they would have been
paying back in December, according to FactSet.
Some retail investors prioritize low fees, said John Hoffman,
Invesco's head of Americas, ETFs and indexed strategies. "This is
something we heard from individual investors, and this [QQQM]
should help solve that."
But some ETFs can't get any cheaper, giving rise to clones such
as QQQM.
QQQ, which was first launched by Nasdaq in 1999, is structured
as a unit investment trust, which comes with a higher operating
cost than a plain-vanilla ETF, along with other limitations. The
fund doesn't have the ability to reinvest dividends or engage in
lending securities to short sellers. The latter helps generate some
extra revenue for ETFs, helping to mitigate some of the cost for
investors.
Despite those constraints, QQQ has accumulated $141 billion in
assets and is one of the most traded securities in the world. That
makes it a staple for big institutional investors who give priority
to getting in and out of positions seamlessly over cost. But its
fee relative to other, cheaper ETFs might be a turnoff for
mom-and-pop savers, Invesco executives said.
"QQQM with its lower management fee may appeal to long-term
buy-and-hold investors," added John Feyerer, Invesco's senior
director of equity ETF strategy.
State Street did something similar with the SPDR S&P 500
ETF, the world's biggest ETF and the first ever launched. Also
structured as a unit investment trust, State Street executives had
run into the same limitations as Invesco. Worse, investors in
recent years have plowed more money into similar, cheaper versions
of SPY, the ticker symbol for State Street's fund, run by rivals
BlackRock and Vanguard.
To remain competitive with individual investors, State Street in
January switched the index tracked by one of its smaller funds, the
SPDR Portfolio Large-Cap ETF, to the S&P 500, essentially
making an ETF copy of SPY under the ticker SPLG. SPLG's fee is
0.03%, compared with SPY's 0.09%.
"We're acknowledging that we have diverse users among our
clients who have different need-sets," said Matthew Bartolini, head
of SPDR Americas research at State Street. Mr. Bartolini added that
shares of SPLG trade for less than SPY, giving investors an easier
access point.
Not long after the index change, SPLG, the SPDR Portfolio
S&P 500 ETF, began attracting assets more quickly, more than
doubling in size to nearly $7 billion, according to FactSet. That
is still a sliver of SPY, which has more than $300 billion in
assets.
Still, analysts predict clone ETFs will continue to gather
assets as investors and money managers catch on to the
products.
Eric Reinhold, a financial adviser at Ameriprise Financial
Services LLC in Orlando, Fla., who puts most of his clients in
ETFs, says he plans to start tracking the lower-cost generic funds
as replacements for the originals.
"I'm all about lowering overall fees for clients," Mr. Reinhold
said.
Write to Michael Wursthorn at Michael.Wursthorn@wsj.com
(END) Dow Jones Newswires
October 26, 2020 11:19 ET (15:19 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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