Investing: Here come the zero-fee ETFs

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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 percent 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 percent 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 percent 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 percent fee and contribute the annualized equivalent of 0.05 percent 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.

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 percent of investors’ portfolios in 2018, up from 20.8 percent 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.

(Nellie S. Huang is a senior associate editor at Kiplinger’s Personal Finance magazine. Send your questions and comments to moneypower@kiplinger.com. And for more on this and similar money topics, visit Kiplinger.com.)

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