By Michael Wursthorn
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.
Invesco Ltd. was the latest firm to create a copycat of one of its own ETFs. Earlier this month, it launched the Invesco Nasdaq 100 ETF, a near carbon copy of the biggest tech-focused ETF in the world, the Invesco QQQ Trust, better known as the Qs for its QQQ ticker symbol. Both funds track an index of the 100 biggest Nasdaq stocks, a corner of the stock market that has massively outperformed in recent years.
But there is one glaring difference between the ETFs: fees.
QQQ charges investors 0.2%, meaning for every $1,000 investors put into the ETF they pay $2 in annual fees. The copycat, which goes by the ticker symbol QQQM, charges 0.15%, and shares cost half as much.
The move would have been unthinkable a decade ago. Asset managers risk cannibalizing their most popular products by redirecting assets into other funds, analysts said. But Invesco and other executives in the ETF industry say the copycat ETFs are necessary to compete with rivals that are all seeking the attention -- and cash -- of cost-conscious individual investors.
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.
And analysts say the trend is continuing to play out.
Asset managers have noted the preference, sparking a fee war that has dramatically reshaped how much investors pay for investment products.
Rivals BlackRock Inc., Vanguard Group, State Street Corp., Invesco and others have all slashed fees on some of their most popular products. The fee war has ultimately saved investors some $388 million this year compared with what they would have been paying back in December, according to FactSet.
"Investors have a high preference toward [low] fees," said John Hoffman, Invesco's head of Americas, ETFs and indexed strategies. "This is something we heard from individual investors, and this [QQQM] should help solve that."
But some ETFs can't get any cheaper, giving rise to clones such as QQQM.
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.
Despite those constraints, QQQ has accumulated $141 billion in assets and is one of the most traded securities in the world. That makes it a staple for big institutional investors who give priority to getting in and out of positions seamlessly over cost. But its fee relative to other, cheaper ETFs might be a turnoff for mom-and-pop savers, Invesco executives said.
"QQQM with its lower management fee may appeal to long-term buy-and-hold investors," added John Feyerer, Invesco's senior director of equity ETF strategy.
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.
To remain competitive with individual investors, State Street in January switched the index tracked by one of its smaller funds, the SPDR Portfolio Large-Cap ETF, to the S&P 500, essentially making an ETF copy of SPY under the ticker SPLG. SPLG's fee is 0.03%, compared with SPY's 0.09%.
"We're acknowledging that we have diverse users among our clients who have different need-sets," said Matthew Bartolini, head of SPDR Americas research at State Street. Mr. Bartolini added that shares of SPLG trade for less than SPY, giving investors an easier access point.
Not long after the index change, SPLG, the SPDR Portfolio S&P 500 ETF, began attracting assets more quickly, more than doubling in size to nearly $7 billion, according to FactSet. That is still a sliver of SPY, which has more than $300 billion in assets.
Still, analysts predict clone ETFs will continue to gather assets as investors and money managers catch on to the products.
Eric Reinhold, a financial adviser at Ameriprise Financial Services LLC in Orlando, Fla., who puts most of his clients in ETFs, says he plans to start tracking the lower-cost generic funds as replacements for the originals.
"I'm all about lowering overall fees for clients," Mr. Reinhold said.
Write to Michael Wursthorn at Michael.Wursthorn@wsj.com
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