In passive ETF news, State Street has reduced the fees on its S&P 500 exchange-traded fund (ETF) to 0.02%, making it the cheapest such vehicle on the market that tracks the S&P 500 index.

State Street Continues Passive ETF Race to the Bottom on Fees

In the latest passive ETF to cut fees to the bone, The Wall Street Journal reported that State Street has reduced the expenses on its S&P 500 exchange-traded fund (ETF) to 0.02%, making it the cheapest such vehicle on the market that tracks the S&P 500 index. By doing this, State Street is undercutting itself on its SPDR S&P 500 ETF Trust (ticker: SPY), which has a higher fee.

SPY was the first exchange-traded fund (ETF), known as the SPDR (Standard & Poor’s Depositary Receipts) or “Spider,” and was introduced in January 1993 by State Street. This investment vehicle was designed to track the S&P 500 index and trade on the American Stock Exchange, providing investors with a convenient way to gain exposure to a broad market index without the need to purchase individual stocks. Since then, the ETF industry has experienced explosive growth, so much in fact that ETF trading is a large portion of stock market trading volume.

This begs the question: If so many investors are buying ETFs and fewer are buying individual stocks, who are the informed market participants that are ensuring stock prices accurately reflect the value of the underlying business?

Maybe they are too small to matter?

Various other firms market ETFs that track the S&P 500, such as Vanguard with its Vanguard 500 Index Fund (ticker: VOO) and iShares Core S&P 500 ETF (ticker: IVV).

In reality, these changes make little difference to investors because the fees on these ETFs are already about as low as they can go. Susan Thompson, head of SPDR Americas distribution at State Street, said “I think we’re getting pretty close to the end. If someone goes to zero, then they’re doing it as a loss leader.”

The more important question for investors holding a passive ETF is whether they will offer satisfactory returns going forward, since the valuation of the companies in the S&P 500 is near all-time highs at the same time U.S. corporate profit margins are near all-time highs. A decline in margins would hit earnings and a decline in valuation on those earnings (i.e. with lower price-to-earnings ratios) would be a double whammy for passive investors and could lead to some of the scenarios discussed here.

 

 

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