Are exchange-traded funds without fees always the best choice? Before saying “yes”, investors and financial advisors alike should be aware of the total cost of fund ownership.
The ongoing fee war between ETF providers has been celebrated in media circles as a financial windfall for retail investors. Compared to actively managed mutual funds, the expense ratios on ETFs in similar investment categories have always been low. And now with the advent of so-called zero-fee ETFs, annual investment costs are even lower.
Earlier this month, SoFi, an online lender and personal finance site with strong Silicon Valley ties, debuted two no-fee ETFs. The SoFi Select 500 ETF (SFY) owns U.S. large-cap growth companies and the SoFi Next 500 (SFYX) owns U.S. mid-cap stocks. In truth, both funds have a gross expense ratio of 0.19 percent. However, SoFi is temporarily waiving those fees until at least June 30, 2020. After that date, SoFi’s ETFs will presumably charge an asset management fee and lose their self-proclaimed “no-fee” designation.
In March, Salt Financial went one step further when it filed with the Securities and Exchange Commission for an ETF that would pay shareholders 50 cents for every $1,000 invested, $5 for every $10,000 invested, etc. The Salt Low TruBeta US Market ETF is designed to track an equal-weighted index of roughly 100 large and mid-cap U.S.-listed stocks with the lowest levels of variability in their historical beta calculations and a forecasted beta of less than 1.00. Beta is a calculation of an investment’s systematic risk relative to the market.
This pay-to-own feature would end either when the fund reaches $100 million in assets or until April 30, 2020. Afterward, it would charge an expense ratio of 0.29 percent.
Before assuming that ETFs without management fees are the right option, it’s crucial to analyze the full spectrum of ETF ownership costs. Let’s examine three key metrics.
Bid/Ask Spreads
Although an ETF may have no expense ratio, the trading cost of that particular fund may be exorbitantly high. Generally, established funds with lots of assets like the SPDR S&P 500 ETF (SPY) will have very tight bid/ask spreads in the pennies. But the bid/ask spread for newer funds that lack both assets and trading volume may be wider, thereby pushing up a fund’s ownership cost.
To better help ETF investors have a handle on trading costs, Morningstar.com reports ETF bid/ask spreads in the same manner as the expense ratio. And according to that site, SPY has a bid/ask spread of essentially 0 percent, while the spread on the SoFi Select 500 ETF is at 0.39 percent and the SoFi Next 500 is at 0.20 percent.
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