Investors are gravitating to ultra-cheap ETFs in 2020. The ten largest U.S. listed ETFs with expense ratios less than 0.05%, or $5 for every $10,000 investment, gathered more than $60 billion in net inflows year to date as of July 20, according to CFRA’s First Bridge ETF database.

“This cash haul is equal to 26% share of the $230 billion net inflows and is higher than the 18% share of the U.S. ETF market held by those 10 ETFs,” CFRA’s Senior Director of ETF and Mutual Fund Research Todd Rosenbluth said in “Long Live Fund Fee Wars,” a proprietary research paper released today.

In contrast, zero-fee ETFs have not fared as well. “While a free ETF can be eye-catching, investors have remained loyal to broadly diversified and extremely low-cost offerings from iShares, Vanguard and Schwab. While investors can save a few basis points through a free fund, they need to be mindful of incurring tax implications and that not all ETFs track the same index. What is inside a fund matters more than the expense ratio,” Rosenbluth told Financial Advisor Magazine.

Key Takeaways of CFRA findings include:

  • The ten largest ETFs charging expense ratios of less than 0.05% gathered $60 billion of new money thus far in 2020. Vanguard S&P 500 ETF (VOO), Vanguard Total Stock Market ETF (VTI) and iShares Core S&P 500 ETF (IVV) have been among the more popular funds.
  • Demand for four zero-fee funds from SoFi and BNY Mellon stands in stark contrast; they gathered just $37 million this year. Investors have not seen many benefits to swap to a cheaper alternative from less-known ETF providers.
  • However, Fidelity’s four zero-fee mutual funds gathered more than $9 billion in assets since their summer 2018 launch, led by $5.4 billion Fidelity ZERO Total Market Index Fund (FZROX), and provided brand benefits for other Fidelity funds.

“iShares, Vanguard, and Schwab have had tremendous success. IVV is the largest, with $204 billion in assets and $4 billion of net inflows. However, VOO and VTI have pulled in more this year, with $22 billion and $12 billion of net inflows, respectively. This is partially we think due to IVV charging a slightly higher 0.04% fee for part of the year, before iShares matched Vanguard at 0.03% in late June. A fourth ETF, Schwab US Large Cap ETF (SCHX), which charges 0.03%, gathered $1.3 billion,” Rosenbluth said.

While cheaper ETFs launched in 2019 and 2020, they have failed to garner much investor attention. To break into the ETF market, SoFi and BNY Mellon each recently launched a pair of ETFs with no expense ratio.  “Despite investor infatuation with minuscule expense ratios, these funds have not been instant successes. Sofi Select 500 ETF (SFY) is the largest and as of July 20 was about to hit $100 million in assets, with $23 million of net inflows in 2020. SFY launched in April 2020 and although it sounds like it tracks the broad S&P 500 Index, it is weighted based on three fundamental growth factors and tracks a lesser known proprietary index,” Rosenbluth said.

BNY Mellon Core Bond ETF (BKAG) tracks a third-party Bloomberg Barclays US Aggregate Total Return Index and charges a lower fee than AGG and BND. Since launching in April 2020, the fund has only gathered $5 million and has $31 million in assets, CFRA reported.

Meanwhile, JPMorgan BetaBuilders US Equity ETF (BBUS) launched in March 2019 and has pulled in $86 million of new money in 2020 to push its asset base to $163 million. “BBUS charges a 0.02% expense ratio, but we expect assets to grow faster given the success of other broadly diversified and cheap JPMorgan ETFs. For example, JPMorgan BetaBuilders International Equity ETF (JPIN) and JPMorgan BetaBuilders Japan ETF (BBJP) pulled in $1.7 billion and $707 million in 2020, after launching in December 2019 and June 2018, respectively,” Rosenbluth said.

Overall, however, the four zero-fee ETFs and BBUS pulled in just $123 million in 2020 and have $342 million in assets, “highlighting the challenges of succeeding in a concentrated, competitive, and brand-driven ETF market even when a firm is willing to forgo fee revenues. Investors are willing to pay a slight premium to retain existing business and avoid paying taxes to swap from iShares, Vanguard, and Schwab to a new offering,” he said.

In contrast, zero-fee index mutual funds have been more successful. While asset management peers have focused on low-cost, broadly diversified index ETFs, Fidelity has more recently focused on offering cheap index mutual funds, the CFRA paper reported.

In August and September 2018, Fidelity launched four equity index funds with expense ratios of zero. Fidelity ZERO Total Market Index Fund (FZROX) provides exposure to large-, mid-, and small-caps in a market-cap weighted strategy. FZROX, which earns a CFRA five-star rating despite being less than two years old, already gathered $5.4 billion in assets. Meanwhile, Fidelity ZERO Large Cap Index Fund (FNILX) earns a four-star rating and has $2.0 billion in assets. This fund focuses on just large-cap companies.

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