As ETFs Get Cheaper, Wall Street Looks for Ways to Charge More

(Bloomberg Businessweek) -- Investors love exchange-traded funds because they’re simple and cheap. With some index funds now charging zero fees, it’s getting harder for asset managers to make money selling investors the basics. Watch ETFs get more complicated.

Chasing Themes

Some ETFs have a storytelling hook, such as the rise of self-driving cars, vegan foods, or digital banking. State Street Corp. has started an ETF that buys companies involved in sea or space exploration. Goldman Sachs Group Inc. has a “human evolution” fund in the works to invest in genomics, life extension, and robotic surgery. Assets in theme funds have almost doubled over the past 18 months, to more than $20 billion.

Banking on Bitcoin

Several companies have been lobbying for the U.S. Securities and Exchange Commission to allow an ETF that can buy the digital currency or related futures contracts. The watchdog worries that the crypto market is too opaque and vulnerable to manipulation, and it rejected plans for nine funds in August. But the agency is reviewing those decisions, and at least one commissioner wants to see a Bitcoin ETF get the green light.

Complex Hedges

New “defined outcome” ETFs use options contracts to offer investors a cushion against stock market drops. But they may come with lower returns than a plain stock fund, because they also cap investors’ gains when the market rises. Their fees are almost double that of the average ETF.

The Smart Set

So-called smart-beta funds track indexes that favor stocks with a common characteristic, such as low volatility or cheap valuation, that’s been associated with outperformance. But a paper from Research Affiliates—an early advocate of such strategies—warns that investors have to be prepared for long stretches when these funds lag the market. 

To contact the editor responsible for this story: Pat Regnier at pregnier3@bloomberg.net

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