Should investors be wary of zero-fee ETF "gimmick"?

Should investors be wary of zero-fee ETF "gimmick"?

Should investors be wary of zero-fee ETF "gimmick"?

Eyes across the investment-fund world are fixed on the US, where ETF providers are locked in a game of fee one-upmanship. In February, online lending platform SoFi announced plans to launch zero-fee ETFs, cutting ahead of favourites like JP Morgan, BlackRock, and Vanguard. Shortly after that, Salt Financial made another splash by offering to pay investors to buy into its own ETF.

One might consider this trend a win for cost-conscious buyers; after all, every dollar saved on fees is a dollar that goes toward generating returns. But according to one investment industry professional from Europe, investors will “need to be wary” of zero-fee ETFs

“It’s worth remembering zero fund fees are a misnomer – it’s like when you apply for a mortgage and see all the special offers, but when you look at the small print you see all sorts of clauses,” said Hector McNeil, co-CEO of London-based white-label ETF platform HANetf.

As reported on ETFStrategy, McNeil argued that zero fees are just a gimmick to lure people. While one tracker may be free for investors, it might require them to shift their assets onto a specific platform, which he said could cost them more money and leave them out of the market for a significant amount of time.

Moving their assets to a given platform, he added, could also limit the choices an investor has, assuming they do not only buy the single, zero-fee tracker. The argument could be taken further if one supposes other options offer promise better performance, but come with higher fees.

“Investors should assess whether the cost and hassle of moving is worth what will be, in all likelihood, a very minuscule saving versus other ETFs,” McNeil said. “It’s not good for the end consumer because price should only be one factor when making an investment choice.”

Investors and advisors may be coming alive to that fact. In its sixth annual investor survey released earlier this year, Brown Brothers Harriman found that professional investors are starting to look beyond the lowest-cost products. Historical fund performance started to appear on par with expense ratio when it comes to ETF selection factors. Coming from last year’s bouts of global market volatility, there’s also been increased interest in tactical vehicles like smart-beta and active ETFs to bolster returns or mitigate risk.

McNeil added that zero-fee ETFs are actually not a new tactic. There were some launched a decade or so ago, he argued, but were quietly dropped later by the provider. Those eager to see no-fee ETFs might say that things are different now — the industry has grown larger, for one thing, with global ETF and ETP assets reaching US$5.32 trillion in February, according to research and consultancy firm ETFGI.

To other ETF market watchers, however, the aggressive price cuts hint at a growing desperation among asset managers. As questions about whether the industry has reached “peak passive” grow louder, funds are getting more eager to quickly acquire investor assets and clear the minimum-asset thresholds that many financial advisors require. Charging shareholders nothing, or even paying them, is an effective way to do that, but it may very well backfire in time.


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