First 'Zero Fee' ETF Filed

February 25, 2019

Someone in ETF-land has finally won the race to zero—but it wasn't by an issuer anyone expected.

On Monday, online personal financial services company Social Finance, Inc. (SoFi) filed for the industry's first (effectively) zero-fee ETFs.

The filing is an update of an existing fund filing made back in January, adding expense information for each of four ETFs in preparation for the funds' launches (read: "Newcomer Tidal Plans 4 ETFs").

Fee Waivers = Zero Fees

The information became available in SoFi’s latest filing for the four funds, two of which appear to be very close to launching. The products include three growth funds and a fund focused on the "gig economy," and are all SoFi-branded funds:

The first three funds will list on the NYSE Arca, while GIGE will list on Nasdaq.

Two of the funds, SFY and SFYX, will have fee waivers in place until at least March 27, 2020, effectively bringing their total fund expenses to zero for the first year of their operation. Fees for SFYF and GIGE are not yet listed.

This isn't the first time a fee waiver has made an ETF free to own. In 2016, State Street Global Advisors briefly waived expenses for its new Real Estate Select Sector SPDR Fund (XLRE) to help ease the transition for investors in advance of a significant revision to the GICS classification standard that separated the financial services and real estate sectors.

Guggenheim (now Invesco) did the same for its S&P 500 Equal Weight Real Estate ETF (EWRE) (read: "What The New Real Estate Sector Means For ETFs").

What's different about SoFi's filing is the duration of its waiver, which will last for at least one year instead of three months. Without the waiver in place, SFY and SFYX would have an expense ratio of 0.19%

Fee Wars Won?

In recent years, the largest players in the fund industry have aggressively lowered the expense ratios on their funds to attract new investors. Today there are 13 ETFs that charge 0.04% and another five that charge just 0.03% offered by five firms, including Vanguard, BlackRock, State Street, Schwab and Invesco.

Combined, these 17 ultra-low-cost ETFs brought in $69 billion in new assets last year alone, or 22% of the industry's total $315 billion net inflows for 2018 (read: "2018's $315B ETF Inflows 2nd Largest Ever").

Fixed By Zero?

Meanwhile, in September, Fidelity Investments took the fee war to a new level by launching the first zero-fee mutual funds (Read: "Fidelity 'Fixxed' By Less Than Zero").

Unlike SoFi's filing, the Fidelity mutual funds carry zero management fees and no other expenses, making their total operating expense zero in perpetuity.

Fidelity's zero-fee suite, which now includes four equity funds, has a combined $3.36 billion in assets under management. Yet growth in Fidelity's zero-fee mutual funds is inherently limited, because only Fidelity brokerage clients can buy them through Fidelity's own platform.

That's not the case for ETFs: With rare exceptions, most ETFs can be purchased via most brokerage platforms. If an ETF is listed on a public exchange for trade, then anybody can buy them, meaning SoFi's funds could grow without any inherent ceiling in place.

The Difference An ETF Makes

Intriguingly, the service providers listed in the filing include a number of smaller ETF companies, many of which already offer their own ETFs.

The funds' advisor is Toroso Investments, which runs the $7 million ETF Industry Exposure & Financial Services ETF (TETF). Toroso's chief investment officer is Michael Venuto, who also serves as a managing director for Tidal Growth Consultants, the funds' administrator and also owner of the trust through which the funds are being launched. (Venuto is listed as a portfolio manager for the SoFi funds.)

Exponential ETFs, meanwhile, is listed as subadvisor for the SoFi funds; Exponential has three ETFs on the market worth a combined $73 million, the largest of which is the $57 million American Customer Satisfaction ETF (ACSI). Exponential also acts as subadvisor for three ETFs from Amplify ETFs.

As such, SoFi's filing suggests that smaller ETF companies may be coming to the conclusion that the best way to compete with Vanguard, Schwab and BlackRock on fees is by banding together.

SoFi Branches Out

SoFi's zero-fee ETF filing appears to be part of a greater expansion effort by the company to broaden its product lineup and diversify its revenue streams.

Earlier this week, Bloomberg reported that SoFi planned to allow customers to trade stocks and ETFs on its platform later this year. An alpha version of the technology has already gone live for employees and select customers.

Launched in 2011, SoFi began as a student loan refinancing service for college students from high-priced Ivy League schools. While student loans remain the most lucrative segment of its business, the firm has also expanded into a variety of banking and loan services, including personal loans, mortgages and bank accounts. SoFi also has robo advisory and brokerage platforms.

Matter Of Nuance

Investors should keep in mind that, technically, there is a difference between a fee waiver and a zero management fee. Should SoFi's fee waiver expire, investors in its zero-fee funds would be charged a 0.19% management fee. (Some ETFs carry a zero management fee, including the $63 million Cambria Global Asset Allocation ETF (GAA). However, as a fund-of-funds, GAA also charges acquired fund fees, which results in a total expense ratio for the fund of 0.33%.)

Furthermore, it's worth remembering that a zero-fee ETF does not mean its total cost of ownership would be zero. Fund expense ratios are only one part of the equation: There are also trading spread costs and tracking difference to consider (read: "Are Fidelity's Funds Really Free?").

Still, a fund price tag of effectively zero is almost sure to grab attention—and assets—for this ETF industry newcomer.

Contact Lara Crigger at [email protected].

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