Price wars in the ETF industry are heating up and investors are the biggest winners. Salt Financial has taken the race to the bottom to a new level now. It filed for the Salt Low truBeta US Market ETF (LSLT), which has an expense ratio of 29 basis points but will temporarily waive that fee and instead pay investors $5 for every $10,000 invested, taking its expense ratio to -0.05%.
The waiver would be in place until April 30, 2020, but if the ETF reaches $100 million in assets, the rebate will be capped. The fund will invest in about 100 US large and mid-cap stocks with low-volatility.
Salt Financial, a relatively new entrant in the ETF industry has just one ETF--the Salt High TruBeta US Market ETF --as of now with about $10 million in assets under management. SLT provides exposure to high beta stocks for more aggressive equity allocations.
Earlier this week, JP Morgan launched two ETFs that are the cheapest in their respective classes. The JPMorgan BetaBuilders U.S. Equity ETF (BBUS) that provides diversified exposure to US large and mid-cap stocks, charges just 2 basis points or $2 for every $10,000 invested, making it cheaper than the iShares Core S&P Total U.S. Stock Market ETF and the Vanguard S&P 500 ETF.
Last month, online lender SoFi had filed for industry’s first zero-fee ETFs. The SoFi 500 ETF (SFY) and the SoFi Next 500 ETF (SFYX) have an expense ratio of 19 basis points each that would be waived for the first year, making them free to investors.
Last year, Fidelity had launched four zero-fee index funds. Fidelity got a lot of publicity after free funds that gathered more than $3 billion within weeks of their launch but the interest has since waned.
The ETF industry has become increasingly crowded and ultra-competitive and it’s not easy for a new ETF to gather assets. We have seen a surge in ETF closures of late, as many new ETFs fail to reach scale required to survive.
Most investors do not want to consider a new ETF if an established product with a similar strategy is available at a reasonable price. And, financial advisors do not recommend them or use them in model portfolios.
Bloomberg reported that Salt Financial’s Tony Barchetto wrote in a comment letter to the Federal Trade Commission in January: “The most common “gates” that new funds face are based on assets under management, liquidity, or time since the fund launched. The asset-based gates range from about $25 million to upwards of $500 million or more per fund.”
Investors are becoming very cost sensitive and putting their dollars in the cheapest funds but they need to understand that free may not be really free. Providers may treat these funds as loss leaders and hope to sell other higher fee products to customers who join their platforms.
While expense ratios are very important in evaluating ETFs, investors should also consider other factors. And, cost difference doesn’t matter when it comes to a few basis points. Ultra cheap, highly liquid ETFs like ITOT, IVV and VOO that charge just 3-4 basis points are as good as zero fee ETFs.