Free is no longer cheap enough in the ultra-competitive market for ETFs.
Salt Financial, which currently runs one $10 million ETF, plans to woo buyers with a fund that will temporarily pay them to invest, according to regulatory filings. During the first year, holders will receive 50 cents for every $1,000 in a new low-volatility stock ETF — until it grows to $100 million when the cash-back benefit will be capped and shared with all investors. The rebate is until at least April 2020, when a $2.90 management fee could kick in.
Asset managers are getting increasingly aggressive on price as they seek to stand out in an ETF marketplace with more than 2,000 options. Salt Financial plans to fast-track its growth by undercutting them all. If the move is successful and lures investments quickly, that could allow the company to overcome minimum-asset requirements enforced by some large broker-dealers that restrict which funds their advisers can buy.
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Fee wars are great for clients, but don’t judge a fund solely on its expense ratio.
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The Fidelity Zero Total Market Index Fund attracted $753.5 million through Aug. 31, while the Fidelity Zero International Index Fund gathered $234.2 million, according to Fidelity’s website.
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Let’s face it, portfolio management will never be free.
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“The distribution channel for newer products is inhospitable for new issuers,” 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 company will spend as much as $50,000 (on top of costs associated with running the fund) to encourage investors to move over.
The cheapest ETFs currently charge just 30 cents for every $1,000 invested, data compiled by Bloomberg show. Vanguard, BlackRock, State Street and Charles Schwab all offer broad stock funds at this price. Factor-based equity funds, like low volatility, charge an average $4.40.
Costs have been falling fast. Social Finance won’t charge a management fee for at least a year on two funds its helping start, regulatory documents showed last month. JPMorgan Chase meanwhile unveiled plans for the cheapest ETF yet this week.
