Market Overview

Cheap ETFs Are All The Rage, But Investigation Is Required

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Cheap ETFs Are All The Rage, But Investigation Is Required

One of the more prominent themes in the world of exchange traded funds this year has been diminishing costs. Whether it's by way of brokers eliminating commissions, issuers lowering annual expense ratios and some even introducing ETFs with no fees, it's clear “cheap” is here to stay in ETF Land.

What Happened

Data continue to confirm that the ETFs with expense of ratios of 0.10% per year ($10 on a $10,000 investment) or less command the bulk of investors' assets. Those data points also indicate issuers pushing products with fees too far above 0.20% annually better be offering something spectacular or risk not garnering investors' capital.

Still, low fees aren't guarantees of immediate success for some ETFs.

“Investor infatuation with low-cost ETFs remained high in 2020, though not necessarily as CFRA forecast a year ago. In the first 11 months of 2019, ETFs that charged just $0.05 for every $100 dollar (0.05% net expense ratio) or less gathered $85 billion, equal to 32% of the industry’s net inflows,” CFRA Research Director of ETF & Mutual Fund Research Todd Rosenbluth said in a Monday note.

“However, ETFs that launched in 2019 from upstarts with a much-anticipated zero or a negative fee pulled in just $67 million of this new money, as investors instead chose to pay a small fee to more established asset managers iShares, Schwab, State Street Global Advisors and Vanguard.”

Why It's Important

The SoFi Select 500 ETF (NYSE: SFY) debuted in April as part of a pair of ETFs with 0% expense ratios. SFY is showing inklings of being a success story with nearly $59 million in assets under management, a tally that's solid considering the length of time the fund has been on the market and that SoFi is still accumulating brand recognition in the ETF space.

SFY is a refreshed view on traditional growth ETFs as the SoFi fund uses account sales growth, revenue growth and forward sales estimates to measure growth.

As Rosenbluth notes, investors have been fans of more prosaic growth ETFs this year, such as the Vanguard Growth ETF (NYSE: VUG) and the SPDR S&P Growth ETF (NYSE: SPYG).

VUG and SPYG both charge 0.04% per year and have taken in $1.6 billion and $1.1 billion, respectively, in new assets this year.

What's Next

It's clear investors have an affinity for low-cost ETFs, but they should also look under the hood before jumping in.

“While there is an intense battle among the large ETF providers to appeal to cost-conscious advisors and investors, CFRA recommends the focus be on what’s inside the fund since that plays a larger role in future performance,” Rosenbluth said.

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