Halfway through the year, ETF investment flows have been strong, but not like last year.

Through July, $148 billion has flowed into the U.S. exchange-traded fund business, a respectable 4 percent increase in assets under management. The U.S. ETF business is now valued at a little more than $3.6 trillion, but the inflow is a far cry from last year, when roughly $240 billion came in during the first six months.

Is the ETF juggernaut stalling? “It’s premature to call $148 billion in inflows ‘stalling out,'” Dave Nadig from ETF.com told me, “But the market is not at all-time highs either.”

One surprise on inflows: While U.S. equity continues to see modest gains, ($53 billion, or 34 percent of total inflows), investors have not given up their love affair with U.S. fixed income, which added $50 billion, though a large part of that was into high yield.

That’s not surprising. The primary risk in high yield is not interest rate risk, it’s credit risk, and with the U.S. economy so strong, credit is holding up well. One of the largest high yield ETFs, the iShares High Yield Corporate (HYG), is down less than 1 percent this year.

Inflows are not the hottest topic in the ETF business: It’s fees. The industry is worried because fees keep dropping. A few years ago, money was flowing out of anything with a higher fee (certainly anything that charged more than 100 basis points) and into lower cost index funds.

Now, even the lower cost index funds are cannibalizing each other. Once again, it’s the investor who wins, but the economics of the ETF are getting more and more difficult for the issuers.

“If you don’t have scale, it’s starting to look really tough,” Nadig said.

You can see this trend in some of the biggest ETFs in the world, where investors are swapping out of widely held index funds into smaller funds that offer virtually the same exposure, but at a lower cost.

Investors have been moving out of the biggest ETF in the world, the SPDR S&P 500 (SPY), with its 9 basis point annual fee ($9 per $10,000 invested), and into the Vanguard S&P 500 (VOO), with a mere 4 basis point fee. SPY has $270 billion under management, but it lost about 7 percent of its assets. The VOO saw flows increase by nearly 7 percent.

Investors are also moving out of iShares MSCI EAFE (EFA), BlackRock’s main iShares product for broad investment in Europe/Australasia/FarEast, with a fee of 32 basis points, and into a nearly identical product from the same company, the iShares Core MSCI EAFE (IEFA), with a mere 8 basis point fee. EFA saw outflows of 14 percent of its assets, but IEFA saw inflows of 30 percent.

And then there is the trade away from iShares Emerging Markets (EEM), with a relatively high fee of 69 basis points, which saw a decline of 17 percent in assets under management. The iShares Core MSCI Emerging Markets (IEMG), which charges only 14 basis points, had an increase of 18 percent in assets under management.

Fidelity has just announced two no-fee index mutual funds, leading to stock declines for major asset managers like BlackRock, Franklin Resources, Federated Investors and Legg Mason on Wednesday. Fidelity’s announcement was partly in response to recent price reductions from Vanguard and Schwab.

It’s only a matter of time for the no-fee ETF to show up.

We already have commission-free ETF trading on many platforms. This month, Vanguard is making a big move to relaunch its brokerage platform with free trading of almost all ETFs in the industry.

BlackRock, whose stock dropped 4.6 percent on the Fidelity news, issued a statement noting that iShares can trade commission free on Fidelity and that iShares would be a beneficiary: “As a long standing partner with Fidelity on ETFs, we are pleased that Fidelity has expanded the number of commission-free iShares funds on its platform to 240. Investors and advisors will now have even greater access to iShares ETFs as key building blocks for their investment portfolios.”

Of course, zero commission does not mean zero-fee, but you get the point.

As for my assertion that we will eventually see a zero-fee ETF, BlackRock shot back: “ETFs are THE tool for asset allocation and we have absolutely no expectation for zero-fee ETFs,” it said.

So there.

Originally published at CNBC

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