Management fees, part of the expense ratio of funds, have always been considered one of the primarily nuisances for investors when deciding between a fund and individual stocks. Don’t confuse management fees with commissions fees when buying into funds. They are two different animals. These days ETFs are free when buying through a discount broker like Questrade.
However, for the past few years a pattern has emerged where popular ETFs have begun lowering their management fees across all banks and other wealth management houses. Take BMO for example. BMO Aggregate Bond Index ETF (ZAG) has dropped 0.01% to 0.08%. This is their first time lowering any of their funds since June 2016. Granted this drop isn’t that exciting, but this lowering has been happening consistently everywhere.
Although American funds have been more aggressive at lowering their expense ratios compared to Canadian ETF, Canada has also caught the bug and fee dropping has occurred for years now as well.
Fidelity announced they are launching six dividend ETFs in Canada this fall. With that announcement alone you can expect fees to drop even more. This trend is so consistent that it’s very likely that in the near future ETFs will not cost investors anything to own.
Imagine that. A world with no-fees for investors. With few expenses it means you can work your money better by investing more. These costs will no long be a factor when making your ETF decisions. Right now, because ETFs are so similar it just makes sense that people will choose the one with the lowest fee. This is not dissimilar to say going to a hardware store and looking to buy a dust pan. Some come in different colors, but for the most part your decision will be based on which pan is cheapest. With fees approaching zero it forces ETFs to get more creative to grab your attention — possibly being more active to keep the fund from getting stale, or having a wider market coverage reach than the next guy — to improve its diversification level.
When fees do become zero, with all things being equal, it’s very likely investors will just pick ETFs based on their personal experiences with a brand. In other words, investors will need to do more due diligence to decide which is best for them; be it what the funds hold, how often holdings are adjusted, where it invests, and other factors. Whatever the case may be, paying nothing will always be better than the alternative.