What negative-fee ETF's fate says about investing

Fund's radical fee structure wasn't enough to overcome challenges in other areas

What negative-fee ETF's fate says about investing

When the world’s first negative-fee ETF was launched in 2019, it was certainly a curiosity in the fund space, and was the logical conclusion of an ongoing trend of fee compression. Investors were putting their dollars in the lowest-cost products, so it seemed as if racing to zero – and past it, if possible – was a surefire way to attract dollars.

But that’s not how things turned out. As reported by Marketwatch, the Salt Low TruBeta U.S. Market ETF LSLT, attracted only about $9.3 million in its first year in existence. The firm that launched the ETF, Salt Financial, recently announced that the ETF is one of two that would be acquired by another firm, Pacer Advisors.

“When we created the fee structure we knew it was a bit radical, but that was the point,” Tony Barchetto, a co-founder of Salt Financial, told the news outlet. “People kept hearing about fees. But it’s more about value than cost, and our experiment showed that.”

Barchetto and his fellow co-founder, Alfred Eskandar, will continue to manage the indexes underlying the funds in partnership with pacer. From his perspective, the ill-fated ETF held plenty of value for investors, and still does.

“What held us back is distribution,” he asserted, noting that U.S. advisors and end-investors ultimately couldn’t access a way to invest in the fund. While the triumvirate of Vanguard, BlackRock, and State Street Global Advisors draw attention for their collective stranglehold on roughly 80% of AUM in the ETF ecosystem, Barchetto and others say that small funds’ difficulties in getting on platforms run by advisor-dominated firms like Charles Schwab are just as concerning.

Todd Rosenbluth, head of ETF and mutual-fund research at CFRA, called it a “chicken and egg problem”: to be included on many platforms, young funds have to reach a certain AUM threshold at which advisors would be comfortable buying them. But without access to those platforms, they generally can’t reach that critical mass.

As one of the negative-fee fund’s early believers, Rosenbluth recently chose to own up to his misjudgment on Twitter. “I just thought investors were so cost-conscious,” he told Marketwatch, noting how “survey after survey” confirmed that investors were zeroing in on fees as the most important criterion for fund selection.

The key to the puzzle, according to both Rosenbluth and Barchetto, may lie in the increasing bifurcation of the ETF market. On one hand, plain-vanilla index trackers are chosen based on fees; meanwhile, more exotic products that deliver “value” can thrive on higher fees.


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