Negative-fee ETF offers gain for investors, pain for asset managers

Analysts expect no significant effect on investment fund flows, but predict 'an important psychological consequence'

Negative-fee ETF offers gain for investors, pain for asset managers

Earlier this month, the US Securities and Exchange Commission (SEC) gave its approval for the world’s first negative-fee ETF. While that may spell good news for investors, analysts say asset managers have decidedly less reason to celebrate.

According to a commentary from Moody’s Investors Service, the approval of Salt Financial’s Low truBeta U.S. Market ETF (LSLT) is a “credit negative for asset managers because it furthers the relentless march towards fee compression in the fund industry,” reported ThinkAdvisor.

LSLT offers to pay investors a 5-basis point rebate until May 2020; the rebate will be capped once the fund reaches US$100 million in assets. Salt Financial President and COO Alfred Eskandar has explained that the ETF’s fee structure was conceived as a result of the firm’s struggles to attract assets for its first ETF.

“New ETF issuers have two choices — they can do their best to survive for the six years it takes on average to get to US$100 million, or they can do something more drastic that gets them there quicker,” Eskandar said in an interview with the Financial Times.

The negative-fee ETF was announced following a series of no-fee fund announcements, including two zero-fee ETFs from SoFi and four zero-fee mutual funds introduced by Fidelity in August and September last year.

Moody analysts did not expect the Salt Financial ETF to “have a significant effect” on investment flows into and out of funds. However, they did expect “an important psychological consequence” that would bolster “the anchoring of ETF fees to around zero.”

Given that transformation in the fund industry, more asset managers will likely have to offer zero or slightly-above-zero fees as they pursue specific gains, explained Moody’s Vice President and Senior Credit Officer Stephen Tu.

“For SoFi, it is to build out its digital ecosystem; for Fidelity, it’s to build out its financial ecosystem,” Tu told ThinkAdvisor. “In the case of Salt Financial it’s for brand awareness and gain of market share.”

The Moody’s outlook for continued fee compression is consistent with recent findings from J.P. Morgan. In a study of US-listed ETFs, the bank found that fees have plunged by 40% over the last eight years, going from an AUM-weighted average of approximately 33.5 basis points to around 20.5 basis points today.

“This lower fee trend has been driven both by investor flows gravitating towards lower fee funds within each region and asset class and the move by ETF issuers to selectively cut the expense ratio on a number of funds,” wrote J.P. Morgan Global Quantitative and Derivatives Strategists Marko Kolanovic and Bram Kaplan.


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