The first free exchange-traded fund is on its way.
Social Finance Inc., the online lender known as SoFi, is helping start two new ETFs that won’t charge a management fee, according to regulatory filings. The funds, which plan to waive charges for at least the first year, will focus on U.S. stocks.
With more than 97 per cent of cash flowing to ETFs going to those that charge US$2 or less for every US$1,000 invested, issuers are under pressure to keep costs to a minimum. SoFi is a new contender in the fee war, after Fidelity Investments made waves when it started the first free mutual funds last year and saw assets in those products quickly grow to US$1 billion. Free funds are loss leaders for issuers, which are betting customers attracted by the low-cost offerings will eventually buy more expensive funds or services.
Investors currently pay 30 cents for every US$1,000 invested in the cheapest ETFs from BlackRock Inc., State Street Corp. and Charles Schwab Corp. Together these three issuers control 60 per cent of the US$3.7 trillion market in U.S. ETFs. Vanguard Group, which runs funds that charge 40 cents, manages another 26 per cent.
While the cheapest funds all track broad indexes of U.S. stocks weighted by market capitalization, SoFi’s offerings come with a twist. The SoFi 500 ETF, ticker SFY, and the SoFi Next 500 ETF, ticker SFYX, will be weighted using a proprietary mix of market cap and fundamental factors. SoFi provided “support in developing the methodology used by the index to determine the securities included,” the filing said.
The funds are free until at least March 27 2020, according to the filing, which lists the waived management fee as 0.19 per cent.
Although the funds are branded by SoFi, the ETFs are being issued through a trust. Toroso Investments is the investment adviser responsible for the two funds, and has hired Exponential ETFs to run them day to day. Solactive AG created the benchmarks.