ETF issuers have increased fees in 2023 and potential need for ongoing adjustments.

ETF issuers have increased fees in 2023, marking a significant shift in the industry after a decade of fee-cutting wars. This change comes as the ETF landscape evolves beyond cheap index-tracking funds. According to MorningStar, around 20% of ETFs tracked last year saw fee hikes, while only 11% saw their fees decrease. This is the first time since 2009 that more ETFs raised their fees than cut them.

The fact that fees have increased is not surprising given the shift towards active investment strategies. ETF providers are now passing on the rising expenses of managing funds to their clients. This is particularly evident in the rise of actively-managed ETFs, factor-based ETFs, and options-based ETFs. These strategies often come with higher fees justified by the potential for above-market performance.

Another factor contributing to the increase in ETF fees is the conversion of mutual funds to ETFs. Mutual funds typically have a more expensive distribution model compared to ETFs, so fund managers are looking for ways to compensate for these costs after the conversions. As a result, ETF fees are being raised.

Investors have taken notice of the rising fees and have been more cautious about investing in funds that increase their fees. They are instead favoring funds that cut investor costs. However, the costs of switching funds can still be a deterrent for retail investors, as it may not always be worth selling an ETF and switching to a lower-cost option.

Certain ETF providers have pricing power and flexibility with their fees if they have a niche in a specific area of the market without much competition. In these cases, investors have limited options and may be willing to pay higher fees for access to that specific market.

Looking ahead, ETF strategists predict that the trend of surging ETF fees will continue over the next few years. The adoption of actively-managed and alternative ETFs, which typically charge higher fees, will likely drive up the average fees paid by investors across all ETFs.

In terms of performance, the top-performing ETFs over the past week include the VanEck Semiconductor ETF, Nuveen Growth Opportunities ETF, T. Rowe Price Blue Chip Growth ETF, iShares MSCI USA Momentum Factor ETF, and iShares Expanded Tech-Software Sector ETF. On the other hand, the bottom-performing ETFs include iShares Mortgage Real Estate ETF, Amplify Junior Silver Miners ETF, PIMCO 25+ Year Zero Coupon US Treasury Index ETF, VanEck Junior Gold Miners ETF, and VanEck Gold Miners ETF.

In terms of new ETFs, American Beacon Advisors launched the American Beacon GLG Natural Resources ETF. This ETF offers exposure to a portfolio of securities within the natural-resources value chain. Direxion also rolled out the Direxion Daily MSCI Emerging Markets ex China Bull 2X Shares, which allows investors to bet on gains in the MSCI Emerging Markets ex-China Index.

Overall, the increase in ETF fees reflects the changing landscape of the industry. As more actively-managed and alternative ETFs enter the market, higher fees are becoming more common. Investors will need to carefully consider the fees associated with their chosen ETFs and assess whether the potential benefits justify the costs.