State Street’s SPLG S&P 500 exchange-traded fund now boasts a rock-bottom fee of 0.02%, marking the culmination of a long-standing fee war among asset managers. This fee reduction has made it one of the most cost-effective index funds available, charging investors a mere 20 cents a year in fees for a $1,000 investment.

The battle over fees among asset managers has been advantageous for investors. According to Eric Balchunas, a senior ETF analyst at Bloomberg Intelligence, this fierce competition has been “hell for issuers, but heaven for investors.”

In today’s investment landscape, individual investors can construct a fully diversified portfolio using ETFs without incurring more than 0.05% in total fees. This is a significant shift from two decades ago when the average fee was around 1%.

While the average ETF fee stands at 0.55%, the asset-weighted average, which accounts for fund size, is a mere 0.17%, showcasing the growing popularity of low-cost options. State Street’s SPLG fund is part of its suite of ETFs aimed at individual investors, featuring lower fees than some of its more prominent offerings.

In a similar vein, Invesco has introduced a lower-cost version of its flagship QQQ ETF, offering a 0.15% fee compared to the 0.2% fee of its original fund.

The ability to offer these lower-cost options is partly due to professional traders needing liquidity from larger funds for sizable transactions. As a result, funds with the lowest fees have attracted the most significant inflows in recent years.

The shift from a commission-based model to a fiduciary, fee-based approach among financial advisers has further driven the adoption of lower-fee funds. Financial advisers are highly motivated to place their clients in cost-effective investments.

Interestingly, while passive investing has been the go-to choice for cost-conscious investors, lower fees are also sparking more interest in actively managed funds. Actively managed ETFs, which comprised 4% of the industry’s total assets at the beginning of the year, have been rapidly growing in 2023. Falling fees for active management are a major factor behind this growth.

However, it’s worth noting that ETF fee compression has slowed down this year, with average fees decreasing at just one-fifth the rate of the past five years. This is partly due to investors increasingly favoring relatively more expensive active funds. The popularity of active funds with lower fees, like the JPMorgan Equity Premium Income ETF charging 0.35%, is contributing to this trend.

Additionally, actively managed funds with competitive pricing, such as Dimensional Fund Advisors’ California municipal bond ETF at a 0.19% fee, are even undercutting passive funds in the same category.

In summary, the relentless fee war among asset managers has significantly reduced costs for investors. While passive investments remain a popular choice for their affordability, lower fees have also spurred interest in actively managed funds, especially as active options become more cost-competitive. This trend has transformed the investment landscape, offering investors more affordable choices than ever before.