Video: Talking The First 'Zero-Fee' ETFs

Earlier this week, online lender Social Finance, popularly known as SoFi, filed for industry's first zero-fee ETFs. The SoFi 500 ETF SFY and the SoFi Next 500 ETF SFYX have an expense ratio of 19 basis points each that would be waived for the first year, making them free to investors.

These two broad market ETFs will hold mid-cap and large-cap stocks, selecting and weighting them by four growth-oriented fundamental factors, including sales growth and EPS growth.

Last year, Fidelity had launched four zero-fee index funds. Fidelity got a lot of publicity after free funds that gathered more than $3 billion within weeks of their launch but the interest has since waned.

After Fidelity's move, we knew that a zero fee ETF would be launched very soon. But, we expected a free ETF from one of the major players in the asset management industry.  In fact, there is a lot of speculation that JPMorgan Chase & Co JPM will be launching one soon. Therefore, the move from a newcomer was surprising but it does make a lot of sense.

Large providers have also been aggressively cutting fees on ETF trading. Last year, Vanguard Group announced commission free trading on about 1,800 ETFs, even those sold by its competitors. Earlier this year, Fidelity and Charles Schwab more than doubled commission free ETFs on their platform.

As funds accumulate assets, it becomes easier for providers to cut fees due to economies of scale. Many ETF providers also generate additional income through security lending.

While costs matter a lot, the difference becomes insignificant when it comes to a few basis points. And expense ratios are not the only factor that investors should consider while selecting ETFs. They should also look at trading costs and other implicit costs.

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