Here Come the Zero-Fee ETFs

The race to the bottom for fund fees has finally hit, well, bottom. Two exchange-traded funds that launched at the beginning of April charge 0% in expense ratios—at least for the first 14 months. Another ETF, awaiting Securities and Exchange Commission review, could initially cost less than zero.

The just-launched free ETFs come from online lender SoFi. The firm will waive each of the funds’ 0.19% annual expense ratio until at least June 2020. SoFi Select 500 (symbol SFY) focuses on growing, large-company U.S. stocks; SoFi Next 500 (SFYX) homes in on shares of midsize and smaller U.S. firms. CFRA analyst Todd Rosenbluth thinks the funds will remain free for more than one year. “Either the funds will be successful and the 0% fee will be extended, or they won’t and the products will shut down,” he says.

Meanwhile, relative newcomer Salt Financial is awaiting SEC approval of a low-volatility U.S. stock ETF that would essentially pay its shareholders to invest, at least for a while. Through April 30, 2020, the adviser says it will waive its 0.29% fee and contribute the annualized equivalent of 0.05% on assets, up to $50,000 per year, to the assets of the fund. That means that for every $10,000 invested in the fund, Salt would put in another $5 to boost the value of the fund’s shares.

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Both Salt and SoFi have come late to the ETF party, so they are hungry for business as ETFs become more popular in investor portfolios. According to Charles Schwab, ETFs made up 33.5% of investors’ portfolios in 2018, up from 20.8% in 2015. “Firms are eager to participate in this growing market, and they are willing to waive fees to do so,” says Rosenbluth.

Investors should note that fees in the new ETFs are waived only temporarily. More important, fees (or the lack thereof) aren’t everything. Before investors buy in, they should examine a fund’s strategy, its underlying index and how it fits with the rest of their portfolio. Additional no-fee ETFs may come along, but they won’t become the norm, says Rosenbluth.

Our defensive picks shine. Kiplinger ETF 20 funds did their job, tracking their indexes through a choppy market over the past 12 months. Vanguard Total Stock Market, even with its 0.03% expense ratio, edged the 8.6% return of its benchmark, CRSP US Total Market index, with a 9.2% gain.

Other bright spots include two defensive U.S. stock funds, Vanguard Dividend Appreciation (symbol VIG) and Schwab US Dividend Equity (SCHD), both of which beat Standard & Poor’s 500-stock index over the past 12 months. Two of our actively managed Kip ETF 20 bond funds, Pimco Active Bond (BOND) and Pimco Enhanced Low Duration Active (LDUR), also beat their bogeys. Foreign stock funds fared poorly due to trade tensions and slower economic growth overseas.