Zero-Fee ETFs To Hit The Market Finally?

With competition intensifying in the ETF space, the fee-cut war has been gaining momentum. In a bid to gain market share, ETF issuers have been lately engaged in a fee war and slashing expense ratios for some of their products aggressively.

The war has reached such a level that Social Finance Inc., an online lender known, also known as SoFi, is eyeing an entry in the ETF world with new passive ETFs charging zero management fee, according to regulatory filings. The funds intend to waive charges (0.19%) for at least the first year of operation.

The funds are SoFi 500 ETF SFY, which looks to track the Solactive SoFi US 500 Growth Index and SoFi Next 500 ETF SFYX, which will follow the Solactive SoFi US Next 500 Growth Index. The funds will be weighted using a proprietary mix of market cap and fundamental factors.

Expenses Do Matter

Cost is an important factor that drives their investment decision. In the long run, cheaper funds can drastically outperform the expensive ones, at least when other factors remain constant.

Consider an expense ratio of 1%, a fund of $10,000 invested at 8% annual return will grow to $19,672 in 10 years, while the same fund invested at an expense ratio of 0.1% will grow by a higher amount of $21,390. The difference between the returns will zoom on increasing the holding period.

Considering the same parameters, with an expense ratio of 0.1%, a fund of $10,000 will grow to $97,869 in 30 years (at the same 8% rate of return). The same fund will however grow to a much lesser value of $76,123 with an expense ratio of 1%.

Success Rate of Low-Cost ETFs

For a long period of time, the lowest cost corner of the market was dominated by Charles Schwab (NYSE:SCHW) and Vanguard. But several other issuers are looking for a bigger pie in the ETF market and to that end have cut their fees considerably in recent times. Most of them like BlackRock, Fidelity or State Street have jumped on the bandwagon (read: State Street Intensifies ETF Fee War).

Fidelity Investments stirred up the entire industry when it started the first free mutual funds last year and saw assets in those products hitting the $1 billion mark fast. Per Bloomberg, more than 97% of cash goes to ETFs that charge $2 or less for every $1,000 invested.

Currently, the lowest expense ratio charged by issuers like Charles Schwab Corp. BlackRock Inc (NYSE:BLK). and State Street Corp (NYSE:STT). is 0.03%. These funds are Schwab U.S. Broad Market ETF (KL:SCHB) , Schwab U.S. Large-Cap ETF SCHX, iShares Core S&P Total U.S. Stock Market ETF ITOT, SPDR Portfolio Large Cap ETF SPLG and SPDR Portfolio Total Stock Market ETF SPTM. Together these three issuers make up about 60% of the $3.7 trillion market in U.S. ETFs. Vanguard Group, which offers its cheapest ETF Vanguard Total Stock Market ETF (AX:VTI) at 0.04%, holds another 26% of the market share (read: Expenses Matter: Dive into 7 Low Cost ETFs).

In fact, the war moved beyond the asset management space and extended to the brokerage level in mid-2018 with industry behemoth Vanguard. Not only Vanguard, Fidelity and Schwab have also entered the fray (read: Vanguard Action to Make ETF Investing More Affordable).

Why SoFi’s Zero-Fee ETFs Launch?

Along with many issuers, we also believe that SoFi is a late entrant to the burgeoning and overpopulated U.S. ETF market. So, it has to make an impression on investors’ mind that its products can make a killing.

Having said this, we would like to note that this isn't the first time that the ETF industry has seen a fee waiver. Per an article published on etf.com, in 2016, State Street Global Advisors temporarily waived expenses for its new Real Estate Select Sector SPDR Fund XLRE. Guggenheim (now Invesco) also did the same for its S&P 500 Equal Weight Real Estate ETF EWRE, per etf.com. It is just that SoFi's waivers are more long-duration.

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