Fund Fee Wars Save Investors Billions

May 01, 2019

ETF.com: We’re already looking at zero-fee ETFs. Is there anything that can derail this trend toward lower and lower fees?

Johnson: I don't think this trend abates any time soon. I don't think it reverses, ever.

ETF.com: There’s no question that lower fees is a great win for investors. But have lower and lower fees cost investors in any other way? Have they compromised anything?

Johnson: That's a great question. I would say, on a net/net basis, it's a win/win for investors. If there's any risk in my mind, it's that investors become too narrowly focused on fees and ignore other implicit costs or opportunity costs.

The example that you referenced—the first zero-fee SoFi ETF—is a perfect case in point where, yes, they charge, for the time being, a zero fee; you're not paying anything to invest in them.

But relative to what? It's not as though they've launched a zero-fee total stock market ETF and you can say, at least in theory, if I hold all else equal, I can save 3 basis points a year relative to owning the Vanguard Total Stock Market ETF (VTI).

This is a fundamentally different portfolio. It's a very growth-oriented portfolio. So, what does “free” mean when you have nothing really to compare it to, when there's no like-for-like and when the opportunity costs, as measured in terms of relative performance, might be meaningful?

Should this portfolio over a longer period of time lag alternatives, what does “free” mean then if I've given up 0.50% a year in annualized returns because I was enticed by the notion of a “free ETF”?

 

Contact Cinthia Murphy at [email protected]

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