The Negative-Fee ETF Isn’t As Crazy As It Sounds

When Salt Financial LLC in May won approval from the Securities and Exchange Commission to pay investors 50 cents for every $1,000 invested with its new exchange-traded fund, the Salt Low truBeta US Market Fund (LSLT), which equates to an expense ratio of negative 0.05%, it seemed like a gimmick. The race to the bottom with fund fees had already produced two ETFs with zero expense ratios from Social Finance Inc. in April. But negative fees? What’s up with that?

“There’s a method to this madness,” says Alfred Eskandar, co-founder, president and chief operating office at Salt Financial, a New York City-based data, index and ETF provider. Yes, it’s aimed at getting exposure and assets for the fund, but it goes deeper than that.

Eskandar and his partner, Tony Barchetto, the firm’s chief investment officer, founded Salt in 2017 after careers in the institutional trading world. Salt’s calling card is its proprietary “truBeta” methodology that gauges the sensitivity of a stock to the broader market by feeding intraday, daily and monthly historical return data into models powered by machine learning algorithms to estimate an individual security’s beta over the next quarter. The firm’s partners contend it’s a more accurate predictive tool of near-future market moves than traditional risk measurement approaches.

Or, as they put it in weather forecasting parlance, a shorter forecast horizon with more data points will lead to a more accurate forecast than one based on seasonal average temperatures from months ago.

Their distinctive approach provided the basis for Salt Financial’s name. “The idea was to enhance portfolios like the way salt enhances dishes by complementing and working with other ingredients—i.e. positions in a portfolio,” Eskandar says.

The truBeta concept underpins Salt’s two passive, equal-weighted ETFs. One is a risk-on product; the other—the LSLT fund with the negative expense ratio—is risk-off. The experience of the former since it launched set the stage for the latter’s bold negative-fee experiment.

The risk-on focused Salt High truBeta US Market Fund (SLT) aims to provide magnified exposure by concentrating the portfolio in 100 large- and mid-cap stocks with higher sensitivity to broader U.S. equity market movements as estimated by Salt’s truBeta forecast. In other words, it goes heavy on stocks Salt believes are likely to move more than the index, and in the same direction depending on market movements. This helps the fund magnify exposure without using leveraged funds that employ derivatives to boost the daily return.

SLT targets 50% more of the market’s returns with the same dollar,” Eskandar says.

SLT debuted in May 2018, and charges an expense ratio of 0.29%. The fund compares favorably to another high-beta fund with a portfolio of 100 holdings—the Invesco S&P 500 High Beta ETF (SPHB). SLT’s year-to-date return of 28.1% through July 12 topped the 24.7% return on SPHB, and SLT’s one-year gain of 8.7% beat the 0.46% return on SPHB.