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Barry Ritholtz

Wall Street Learns That Giving Stuff Away Is Boring

Financial firms introduced a slew of products that didn’t charge fees last year. Investors yawned.

These were free once too.

These were free once too.

Photographer: Denis Lovrovic/AFP/Getty Images

I am unimpressed with “free.” So too, it seems, is much of Wall Street.

It was less than a year ago when large financial firms started offering mutual funds, exchange-traded funds and other products without charging management or trading fees. It was a moment of elation (customers will be knocking down our doors!) and fear (how much will this cost us?). And yet, we now learn that this was mostly a nonevent. Short-term, there were flows of money into these funds without fees -- but that quickly ran its course, and not much has happened since.

This is counterintuitive. Most of the financial world has been stressed out about the pressure on fees. The infamous Vanguard effect, shorthand for how its low-cost products push down fees in the markets it enters, has upended finance, and was one of the primary drivers of the campaign to start offering free products. The rush to lower costs has been one of the dominant investment themes this decade. It has been driven by individuals' newfound love for inexpensive passive investing in the aftermath of the financial crisis.

Yet, there may be a shift afoot. A Morningstar survey found that fees fell 8 percent in 2017, the largest one-year decline ever reported. But after that plunge, quarterly data from 2018 suggests that at least when it comes to large-capitalization passive indexing funds, fees have stabilized. Dave Nadig, managing director of CBOE's, notes the “fetishization of expense ratio has a point of diminishing returns.” It appears, according to the latest data on fees, as if we are at that point now. The race to zero may be reaching its natural limits.