Zero and negative expense ratio ETFs have arrived.

In the past few months, firms have begun to offer zero expense ratio and negative expense ratio ETFs. In an article recently published by the Financial Adviser, two
zero expense ratio ETFs were mentioned. The first were the Sofi Select 500 ETF (ticker: SFY) and the SoFi Net 500 (ticker: SFYX) . Both have temporarily waived fees until at least June 30, 2020.

Then, Salt Financial filed for an ETF with the Security and Exchange commission, named the Salt Low TruBeta US Market ETF, with a -0.05% expense ratio. That’s right…this fund will pay investors $5/year for every $10,000 invested. Similar to the Sofi ETFs, this offer is good until April 30, 2020, or when the fund reaches $100M in assets under management.

So, do these expenses justify selecting them over other ETFs with similar objectives, but charge a higher rate? A recent survey by Brown Brothers Harriman indicated that for U.S.-based advisers and fund managers, expense ratio was the most important criteria. But, there are other factors worth considering.

Other costs matter beyond expense ratios

As my previous journal article “Is There a Free Lunch in Commission Free ETFs?“, I cited three expenses relevant to ETF investments.

1. Expense ratios
2. Trading commissions
3. Bid-ask spreads

The SoFi Select 500 ETF is easy to compare to other ETFs that track the S&P 500 Index. The table below shows its expenses versus ETFs with similar objectives, and offered commission-free from one of the five discount brokers analyzed by ETFMathGuy.

As this table shows, a prudent investor would recognize that the SoFi ETF average bid-ask spread makes it an inefficient way to invest in the S&P 500.

What about the other ETFs with zero and negative expense ratios?

Evaluating the other securities is more difficult, due to their limited return history. After a longer history is available, the returns of these funds could be compared to other ETFs. Then, we could form a table like the one above with ETFs that have a nearly perfect correlation to these funds. Assuming these firms avoid closing these funds, we plan to look at this topic in the future.

Please leave this field empty

Oh hi there
It’s nice to meet you.

Sign up to receive expert commentary in your inbox, every month.

This field is required.

We don’t spam! Read our privacy policy for more info.

Please check your inbox or spam folder to confirm your subscription.