Zero Fee ETF Crosses $1B in AUM for First Time

Zero-fee exchange-traded funds may be catching on.

SoFi took the exchange-traded fund fee war to its logical conclusion in April 2019 when it launched two funds with expense ratios of zero: the SoFi Select 500 ETF (SFY) and the SoFi Next 500 ETF (SFYX). 

While other funds like the Real Estate Select Sector SPDR Fund (XLRE) and the S&P 500 Equal Weight Real Estate ETF (EWRE) briefly offered zero fees before that, those were related to changes to the Global Industry Classification Standard, rather than intentional moves to drum up assets. 

SoFi believed that by undercutting the already rock-bottom fees charged by rival, broad market U.S. equity ETFs like the SPDR S&P 500 ETF Trust (SPY) and the Vanguard 500 Index Fund ETF (VOO), it could stand out in arguably the most competitive segment of the ETF industry. 

Nearly four years later, SoFi’s gambit has shown decent results. While SFYX has been a disappointment, gathering only $55 million in assets under management, SFY has done reasonably well, collecting $434 million, according to Bloomberg data. 

That’s nothing next to the multihundred-billion-dollar funds that offer similar exposure, but SFY is on a solid trajectory and could become a billion-dollar fund in the coming years. 

In that sense, it has been a success. Gathering assets of any significance in the most competitive segment of the ETF industry is no small feat.  

On the other hand, you might have expected the first zero-fee ETF to do better. In an industry where seemingly every basis point has driven billion of dollars from one fund to another, zero would seem to be a massive selling point. 

One thing that could be holding SFY back is the fact that its zero fees come through a fee waiver. The ETF’s actual expense ratio is 0.19%, but the fee has been waived one year at a time since its launch. 

Though SFY has been a legitimate zero-fee fund for almost four years now, investors often operate on much longer timelines. Presumably, the waivers will end eventually, and at that point, it will become relatively expensive compared with its peers. That prospect could be turning some investors off. 

First ‘Real’ Zero-Fee ETF  

In April 2020, BNY Mellon launched a pair of ETFs which offer investors a more permanent zero-fee price tag. The BNY Mellon US Large Cap Core Equity ETF (BKLC) and the BNY Mellon Core Bond ETF (BKAG) were the first funds to have expense ratios of zero without waivers.  

That made all the difference. Despite launching a year later, AUM in BKLC topped those in SFY in December 2020. For much of the next two years, the two funds were neck-and-neck and then this happened:  
 

 
In a single session, BKLC’s assets exploded from just over $500 million to more than $1.7 billion.  

BKLC’s bond market counterpart, BKAG, hasn’t seen quite the same success—at least yet—but it’s been steadily accumulating assets over the past few years. Currently, the fund has around $400 million in AUM. 

BKLC’s Moment 

BKLC’s asset explosion this week suggests zero-fee ETFs have truly arrived, but we shouldn’t make too much of it either. 

The difference between no fees and a 0.03% expense ratio is $3 for every $10,000 invested. Even compounded over 30 years at a 10% annual return, the difference is $1,422, or 0.8%.  

That’s probably not enough to sway most investors one way or the other, especially when the decision is between an up-and-coming but relatively small ETF and a giant, well-known ETF like VOO. 

Still, you can never underestimate ETF investors’ insatiable appetite for ever-cheaper funds. 

Perhaps BKLC has a shot to become a next $10 billion or $100 hundred billion ETF. 

A Different Calculus 

That does raise the question, though, about how BNY Mellon benefits from having a massive ETF that generates zero fees. 

For Vanguard, a company owned by its customers, the incentive to continuously lower fees is clear. What’s good for investors is good for the company.  

But when it comes to for-profit companies like BNY Mellon or Fidelity—a firm that launched a suite of zero-fee index funds several years ago—the calculus is different. 

For them, zero-fee funds could be seen as “loss leaders,” or products that bring customers into the companies’ ecosystems where they might purchase more profitable funds or services.  

Scott Ignall, head of Fidelity's retail brokerage service, told AARP that the firm’s zero-fee mutual funds are “a way of bringing new customers into Fidelity who might then choose additional, fee-based products.” 

For Fidelity’s zero-fee funds, that makes total sense, as they can only be purchased with a Fidelity brokerage account. 

For BKLC, it’s less straightforward, as the ETF can be purchased through any broker. An investor buying the ETF doesn’t necessarily have to have any other interaction with BNY Mellon funds or services.  

Still, BKLC’s growing asset base is sure to attract attention, and that could bolster the company’s brand and interest in its other ETFs.  

Email Sumit Roy at [email protected] or follow him on Twitter @sumitroy2