Attracted to cheaper options, a group of Wall Street investors are increasingly abandoning the most liquid products on the planet.
The world’s largest and well-known easy-to-trade ETF — the powerful $387 billion SPDR S&P 500 Trust (ticker SPY) — continues to fall victim to the trend this year as money managers gravitate toward its low-cost clone.
While about $25 billion has flown out of the SPY during 80 days of outflows this year, its smaller brother, which tracks the same index, has absorbed nearly $3 billion with only 32 days of redemptions.
Proximate reason: SPY charges a comparatively only 3 basis points versus 10 basis points for its smaller clone, known as the $15 billion SPDR Portfolio S&P 500 Exchange-Traded Fund (SPLG).
Similar dynamics have also affected big-name ETFs that invest in everything from Big Tech stocks and high-yield credits. For example, the $181 billion Invesco QQQ Trust Series 1 ETF (ticker QQQ) posted outflows of approximately 70 days, compared to just 20 days for the $5.5 billion Invesco Nasdaq 100 ETF (QQQM).
The increasing demand for low-cost products is a long-established trend in an industry renowned for its duty wars. But it could be an increasingly smart option for those seeking to rebuild long-term exposure this year given cost pressures everywhere.
“For a retail or purely buy-and-hold investor who is looking for a position for the long term, cheap ‘mini’ ETFs that provide equal access make a lot of sense because they are given that enormous liquidity. It doesn’t have to cost much for the money,” according to Cynthia Murphy of the ETF think tank.
Credit traders are swapping out the $14 billion iShares iBoxx High Yield Corporate Bond ETF (HYG) for the smaller iShares Broad USD High Yield Corporate Bond ETF (USHY), Bloomberg data shows. USHY is on track to beat HYG in flows for the second year in a row.
More expensive ETFs such as SPY or QQQ provide liquidity almost unmatched with high daily volumes for hedge funds and the like. But according to industry experts, cost-conscious financial advisors and retailers are trying to save a few basis points per year.
The sheer amount of SPY turnover and its sheer size have given rise to an ecosystem around the ETF, in which institutions and professional traders use the product to transfer exposure – often on an intraday basis. This is a different use case than the SPLG, which is more attractive to buy-and-hold allocators, rather than fast-money traders doing frequent transactions.
liquidity weapon
Bloomberg Intelligence’s James Seifert said, “SPY is the most liquid security on the planet.” “You add options and futures and everything,” he said, “and nothing comes close.”
In addition to QQQ and QQQM, Invesco launched the Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (PDBC) in 2014, a follow-up to the 2006 vintage Invesco DB Commodity Index Tracking Fund (DBC). PDBC, which charges 59 basis points, has accumulated more than $8 billion in assets, surpassing the $3.6 billion DBC, which has an expense ratio of 88 basis points.
According to Invesco’s Jason Bloom, instead of simply reducing fees, it makes sense for issuers to launch two different pricing tiers of the same strategy to appeal to a broader swath of investors.
“It may look like on the surface you are launching a clone of an old fund with a low expense ratio because people are complaining about the management fee. It’s usually not the whole story,” said Bloom, head of fixed income and alternative ETF strategies. “It can take years to build up to the level of assets under management that can be compared to older funds. Hence the older fund may have a very deep liquidity profile and it is going to remain relevant.”
There’s also the simple fact that higher fees generate more money for veterans of Wall Street funds. SPY for State Street Global Advisors brings in approximately $368 million annually, while SPLG drives approximately $4.6 million. This math also applies to the largest commodity ETF, the $56 billion SPDR Gold Shares Fund (GLD), which charges relatively high fees of 40 basis points and pulls in more than $220 million per year.
“These funds — SPY, GLD, QQQ — are some of the largest funds, which are major sources of revenue for these firms,” said Murphy of the ETF think tank.
This story has been published without modification in text from a wire agency feed. Only the title has been changed.
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