Goldman Starts Smart Beta ETF Price War

The reason: "Investors are embracing lower-cost products, and the asset managers are working hard to get a piece of the pie," says Rosenbluth. "Some of them are willing to enter with a lower price point in an attempt to gain share."

Many asset managers with actively managed funds have been investing in smart beta products in the hopes that their lower costs would "reignite asset growth" at a lower price than their active funds and at a higher price than plain vanilla index funds, says Stephen Tu, senior analyst at Moody's Investors Service.

"Smart beta is the new active," says Tu. He explains that when an actively managed fund outperforms its benchmark index, the primary reason is often the investment tilt or investment factors it favors in managing the fund. (Common factors used besides equal weighting include momentum, size and quality.) Smart beta funds, then, have a greater potential to outperform traditional actively managed funds for a lower cost, according to Tu.

They traditionally charge about half the median price of actively managed funds — 34 basis points versus 68, according to Tu. He says Goldman is now "solidifying a price point below 10 basis points for a simple smart beta strategy" — the segment of the fund industry that has been receiving the most asset flows. "The move is significant."

How low can these charges go? Down to five to 10 basis points eventually, says Tu, adding that some plain vanilla ETFs are now priced as low as zero to five basis points. (Even at zero, asset managers can make money through securities lending, says Tu.)

Ben Johnson, director of global ETF research at Morningstar, anticipates "cost competition in this space will become more prominent in the years to come."

— Read No Slowing of ETF Growth, Just New Areas to Grow Into on ThinkAdvisor.