New Breed of Complex Funds Are Bucking the ‘Vanguard Effect’

The average cost of newly launched ETFs has reached a record high of 0.65%, according to Bloomberg Intelligence, signaling a departure from the trend of ultra-low-cost investing championed by Vanguard founder Jack Bogle. This increase in ETF fees suggests a shift in the market, potentially driven by demand for more complex or specialized investment strategies despite the higher expense ratios.

Analysis

The average expense ratio for newly launched Exchange Traded Funds (ETFs) has reached a record 0.65% in the current year, according to data from Bloomberg Intelligence. This development marks a significant departure from the long-standing trend often referred to as the 'Vanguard Effect,' characterized by relentless downward pressure on fund fees, a principle championed by the late Jack Bogle. The observed increase suggests a potential structural shift within the $14 trillion global ETF industry, possibly driven by an increased supply of, or investor appetite for, more complex, actively managed, or thematic ETFs which inherently command higher management fees compared to traditional passive, broad-market index funds. This trend implies that ETF issuers are finding traction with specialized strategies, challenging the prevailing notion that ultra-low cost is the primary driver for asset accumulation in new ETF products.

Key Decisions for Investors

• Investors should meticulously scrutinize the fee structures of new ETFs, particularly those offering complex or niche strategies, to ensure the potential for alpha generation or specific market exposure adequately justifies the higher expense ratios.
• A heightened level of due diligence is warranted when selecting new ETFs, as the proliferation of higher-cost, specialized products requires careful assessment to ensure alignment with individual investment objectives, risk tolerance, and the overall portfolio construction.
• Consider monitoring this trend of rising average fees for new ETFs, as its persistence could impact the cost-effectiveness of accessing certain market segments or strategies via newer ETF offerings versus established, lower-cost alternatives.