Vanguard, SoFi Lead the Latest Charge to Cut Fund Fees – Barron’s


Vanguard, SoFi Lead the Latest Charge to Cut Fund Fees


Photograph by Annie Spratt

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Stocks are even cheaper than you think.

Money-management giant Vanguard Group revealed in its latest annual report released last Friday that it now costs $3 to own the entire S&P 500 index. Specifically, the fee on the
Vanguard S&P 500

exchange-traded fund (ticker: VOO) has been lowered to 0.03% of assets, or about $3 per $10,000 invested annually, from $4 previously. The new fee is a third the cost of the biggest, most popular ETF on the market, State Street Global Advisors’ SPDR S&P 500(SPY). The Vanguard fund also undercuts
BlackRock
’s
(BLK) iShares Core S&P 500 ETF (IVV), which charges 0.04%.

“Vanguard has reset the bar in the price competition for asset-allocation products,” says Todd Rosenbluth, director of ETF and mutual fund research at CFRA. “While we’ll soon have zero-fee ETFs from SoFi, these Vanguard products are extremely popular, and investors are more likely to gravitate toward them as they focus more on fees.”

The
Vanguard S&P 500 ETF
’s
$100 billion in assets are dwarfed, for now, by the
SPDR S&P 500 ETF
’s
$260 billion. The SPDR fund, known colloquially as SPY, has become institutional investors’ and traders’ vehicle of choice due to its greater liquidity.

Earlier in the week, Vanguard unveiled lower fees on 10 ETFs, undercutting the firm’s own Admiral mutual-fund shares for the first time. Vanguard’s ETFs are quickly becoming a bigger part of its overall business. As the low-cost revolution in fund management pushed investors to fixate on fees, the firm’s clients increasingly bought ETFs. With assets in various products growing, Vanguard’s business model allows it to pass on savings to its customers.

ETF assets chip in some 20% of Vanguard’s near-$5 trillion in assets, but they accounted for more than 35% of the company’s net cash flow in the past three years. As Vanguard’s ETF assets grow, fees could fall even further, and not only on broad-market stock ETFs.

The
Vanguard Total Bond Market
ETF (BND) has an expense ratio of 0.035%, lower than the
iShares Core U.S. Aggregate Bond
ETF’s (AGG) 0.06% and the
SPDR Portfolio Aggregate Bond

ETF’s (SPAB) 0.04%.

Now, about those zero-fee ETFs from SoFi: The San Francisco-based company, which runs a personal-finance platform aimed at young investors, filed with regulators last Monday to launch a pair of ETFs that effectively will be offered to investors for free. But there might more risk to buyers than this offer implies.

Assuming it gets the go-ahead from the Securities and Exchange Commission, SoFi will launch the SoFi 500 and SoFi Next 500 ETFs, charging a management fee of 0.19% of assets for each. So-called fee waivers will cancel out those fees at least until March 27, 2020, according to filings.

The ETF industry has had a mixed experience with free funds.
Old Mutual

launched a free ETF in 2009, but closed the fund before its half-birthday.
BlackRock
’s
zero-fee
iShares Treasury Floating Rate Bond

ETF (TFLO), introduced in 2014, has been more successful, but the company started charging 15 basis points, or 0.15% of assets, after two years.

Hundreds of ETFs have partial fee waivers, according to Morningstar data. In some cases, fee waivers are reinstated annually, or made permanent.
Goldman Sachs

(GS), for instance, made permanent in 2016 its fee-waiver price of nine basis points, or 0.09%, on its first multifactor ETF, the
Goldman Sachs ActiveBeta US Large Cap Equity

(GSLC)—a move thatBarron’sapplauded at the time because it simplified the cost structure of the ETF for customers.

Ben Johnson, head of passive funds research at Morningstar, characterizes SoFi’s fee-waiver expiration date as a backstop in the event the funds prove too costly. The company has “reserved the right to cry uncle,” he says.

Rosenbluth thinks SoFi will keep its fee waivers on, or make zero fees permanent, or shutter the free ETFs rather than reverting to higher fees. The company declined to comment, directingBarron’sto its public filings.

While investors focus on fees, ETF issuers have had more success attracting assets by focusing on distribution. Some of the biggest fund launches of the past couple of years were blockbusters largely because they were aimed at the firms’ existing client base, including financial advisors.

SoFi’s free ETFs—along with two other ETF offerings, the SoFi 50 and SoFi Gig Economy—probably will be sold on the company’s platform and that of others, including Vanguard’s. SoFi’s ETFs are aimed at millennials, an underinvested cohort, and will. in turn, invest largely in growth companies, according to prospectus filings.

SoFi also offers student-loan refinancing, mortgages, and personal loans, and has a robo investment advisor. It launched a brokerage business last week—speaking of industries that are under relentless fee pressure.

Write toCrystal Kim at [email protected]

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