The $6trn global market for exchange-traded funds (ETFs) is rapidly moving away from its ‘zero-fee’ model that has been the norm for the past two years.
In just a few short weeks, the first and only fund that paid people to invest switched to a new owner and dropped its no-fee policy, while one of the few “zero-fee” ETFs has been shut down completely.
“ETFs have come to a new stage of development where the fee war is only part of the story,” Linda Zhang (pictured), chief executive officer of Purview Investments in New York told Bloomberg. “The next phase of the story is who is able to provide better performing products, net of fee.”
The increasingly competitive landscape that counts with roughly 2,200 ETFs in the US alone has seen issues slash expense ratios amid the intense fight to lure assets.
Salt Financial made headlines last year by releasing the Salt Low TruBeta US Market ETF (LSLT) which would temporarily pay investors, with holders receiving 50 cents for every $1,000 — until it grew to $100m or April 2020 when a $2.90 management fee was introduced.
“The fee war for beta is pretty much over,” Michael Venuto, chief investment officer of Toroso Investments, said. “We’ve seen a lot of people that are done with the fee war and are now interested in, ‘What can I buy that will do better than the market?’”
Last year, he helped Social Finance, an online lender known as SoFi, unveil two funds without fees, the SoFi Select 500 ETF (SFY) and the SoFi Next 500 ETF (SFYX).
SFY currently has $95m in assets and SFYX has $11m . Venuto says the tactic was more for the benefit of SoFi’s existing investors than to attract new ones, and will continue indefinitely for the two products.
Previously, investors enjoyed the benefit of buying into an ETF through their favourite broker for a very small deposit and then paying nothing for its annual management fee.
If zero-fee funds disappear, it wouldn’t necessarily mean a rich new era of profits for ETF issuers. Industry competition remains fierce, especially between giant asset managers like BlackRock and Vanguard, the two largest players.
Last month, BlackRock cut the fees on its largest ETF by one basis point, 0.01%, to match the charges of its rival Vanguard.