ETF Clones Multiply in Industry Fee War

By Michael Wursthorn Close Michael Wursthorn Oct. 26, 2020 5:30 am ET 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.

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.

PREVIEWSUBSCRIBE 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.

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.

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