{"id":21284,"date":"2019-11-03T15:58:47","date_gmt":"2019-11-03T22:58:47","guid":{"rendered":"http:\/\/amicuscuria.com\/wordpress\/?p=21284"},"modified":"2019-11-03T17:34:15","modified_gmt":"2019-11-04T00:34:15","slug":"money-its-a-hit","status":"publish","type":"post","link":"https:\/\/amicuscuria.com\/wordpress\/money-its-a-hit\/","title":{"rendered":"Money&#8211;it&#8217;s a Hit!"},"content":{"rendered":"\n<figure class=\"wp-block-image is-resized\"><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/i2.wp.com\/amicuscuria.com\/wordpress\/wp-content\/uploads\/2019\/11\/Moneyes.jpeg?fit=640%2C235\" alt=\"\" class=\"wp-image-21285\" width=\"640\" height=\"234\" srcset=\"https:\/\/amicuscuria.com\/wordpress\/wp-content\/uploads\/2019\/11\/Moneyes.jpeg 3226w, https:\/\/amicuscuria.com\/wordpress\/wp-content\/uploads\/2019\/11\/Moneyes-300x110.jpeg 300w, https:\/\/amicuscuria.com\/wordpress\/wp-content\/uploads\/2019\/11\/Moneyes-768x282.jpeg 768w, https:\/\/amicuscuria.com\/wordpress\/wp-content\/uploads\/2019\/11\/Moneyes-1024x376.jpeg 1024w\" sizes=\"auto, (max-width: 640px) 100vw, 640px\" \/>\n\n<figcaption>Backoff from my Cash&#8211;Stay away from my Stash!<\/figcaption>\n\n<\/figure>\n\n\n\n\n\n\n\n<figure class=\"wp-block-audio\"><audio controls src=\"http:\/\/amicuscuria.com\/wordpress\/wp-content\/uploads\/2019\/11\/MONEY.mp3\"><\/audio><\/figure>\n\n\n\n<figure class=\"wp-block-image is-resized\"><img loading=\"lazy\" decoding=\"async\" src=\"http:\/\/amicuscuria.com\/wordpress\/wp-content\/uploads\/2019\/10\/CowAssBoy.jpg\" alt=\"\" class=\"wp-image-21246\" width=\"640\" height=\"776\"\/>\n\n<figcaption>Economic Triage<\/figcaption>\n\n<\/figure>\n\n\n\nBy\u00a0<a href=\"https:\/\/www.bloomberg.com\/authors\/ATR8P7ZTClE\/claire-ballentine\">Claire Ballentine&#8211;<\/a>November 3, 2019, 4:00 AM PST\u00a0<em>Updated on\u00a0November 3, 2019, 8:42 AM PST<\/em>\n\n\n\n\n\n\n\n\n<ul class=\"wp-block-list\"><li>&nbsp;Funds that charge nothing may come with unappreciated risks<\/li><li>&nbsp;But an asset-management fee war means trend is here to stay<\/li><\/ul>\n\n\n\n\nIf something sounds too good to be true, it probably is.\n\n\n\nThere\u2019s a dark side to the wave of cost cutting that\u2019s swept through the exchange-traded fund industry over the last 12 months. While every mom and pop in America can now pay&nbsp;<a rel=\"noreferrer noopener\" href=\"https:\/\/www.bloomberg.com\/news\/articles\/2019-10-02\/e-trade-joins-rivals-ending-commissions-in-race-to-the-bottom\" target=\"_blank\">nothing<\/a>&nbsp;to buy an ETF through their favorite broker, and an&nbsp;<a rel=\"noreferrer noopener\" href=\"https:\/\/www.bloomberg.com\/news\/articles\/2019-02-25\/etf-fees-are-falling-to-zero-as-sofi-plans-first-no-cost-funds\" target=\"_blank\">extra nothing<\/a>&nbsp;to cover its annual management fee, concern is mounting that there are catches to this bargain that could surprise investors.\n\n\n\n\n<h3 class=\"wp-block-heading\" id=\"zerosum-game-\">Zero-Sum Game<\/h3>\n\n\n\n\n\n\n\n\nFive ETPs are now available for nothing.<br>\n\n\n\n\n\nBrokerages have been fairly upfront about&nbsp;<a rel=\"noreferrer noopener\" href=\"https:\/\/www.bloomberg.com\/news\/articles\/2019-10-10\/brokers-profit-from-you-even-if-they-don-t-charge-for-trading\" target=\"_blank\">compensating<\/a>&nbsp;for their lost commissions with interest revenue, but managing a fund &#8212; even one that tracks an index &#8212; isn\u2019t free either. It costs about $250,000 per year to run an ETF, with the exact amount depending on what the fund owns, which service providers it hires, and the issuer\u2019s broader business. But one way or another, whether its legal costs, aggressive up-selling or extra risk-taking, investors could wind up paying.\n\n\n\n\u201cThis isn\u2019t UNICEF, there\u2019s a cost associated with doing things,\u201d said Matt Bartolini, head of SPDR Americas Research at State Street Global Advisors, referring to the well-known children\u2019s charity. \u201cMy first question is how are these costs being covered?\u201d\n\n\n\n\n<h3 class=\"wp-block-heading\" id=\"corner-cutting\">Corner Cutting<\/h3>\n\n\n\n\nThe answer? It depends. A fund\u2019s management fee typically covers the cost of licensing or creating an index, admin like record keeping and prospectus mailings, as well as the&nbsp;<a href=\"https:\/\/www.bloomberg.com\/news\/articles\/2017-10-31\/what-the-hack-etf-suit-tells-us-about-the-cost-of-running-a-fund\" target=\"_blank\" rel=\"noreferrer noopener\">expenses<\/a>&nbsp;associated with running a board of directors. Issuers that offer products for free still have these costs, but they have more reason to try to reduce them.\n\n\n\nOne place where efficiencies could be made is in the legal department, which could hurt investors in the event of a lawsuit. Other savings could be made by constructing indexes in-house or licensing lower-cost alternatives, hiring second-tier custodians, or limiting any sales presence or advertising budget. These economies could result in damaging oversights, or increase the likelihood of the fund closing.\n\n\n\n\u201cI would be concerned about the compliance and legal aspect,\u201d said Sam Huszczo, the founder of SGH Wealth Management, a $170 million investment adviser based in Detroit that uses ETFs. \u201cThose are the two areas where I could see corners being cut.\u201d\n\n\n\nSalt Financial, which pays investors to buy its fund, tracks an index of stable companies and only swaps out two or three names per quarter, which lowers transaction costs, according to co-founder Alfred Eskandar. In October, the company said it planned to move the ETF to a trust maintained by U.S. Bank to reduce administrative and operational complexity. The change will also save money, although Eskandar said investors will not be exposed to additional risks. He hopes the lack of fee will encourage investors to try the fund, and that they\u2019ll stick around due to its performance.\n\n\n\n\n<h3 class=\"wp-block-heading\" id=\"the-upsell\">The Up-Sell<\/h3>\n\n\n\n\nAn alternative strategy for issuers with more than one product is to leverage their zero-fee products to generate other business. Fidelity Investments started&nbsp;<a href=\"https:\/\/www.bloomberg.com\/news\/articles\/2018-08-09\/fidelity-bets-on-zero-fee-index-funds\" target=\"_blank\" rel=\"noreferrer noopener\">the first<\/a>&nbsp;zero-fee mutual funds in August 2018, but they\u2019re only available to investors that have a brokerage account with the firm. Meanwhile, Social Finance Inc., an online lender best known for refinancing student loans, views its no-fee products as a way to develop existing clients. Two of its ETFs cost nothing until at least June 2020, but another fund costs $5.90 for every $1,000 invested, more than the median ETF fee.\n\n\n\nThe thinking was \u201cwe\u2019ll provide this for free so you can find out all the other things available in this community,\u201d said Michael Venuto, chief investment officer of Toroso Investments, which helped SoFi start its funds. \u201cIt\u2019s about engagement,\u201d he said, adding that selling more expensive products alongside zero-fee ETFs is not nefarious.\n\n\n\n\n<h3 class=\"wp-block-heading\" id=\"next-step\">Next Step?<\/h3>\n\n\n\n\n\n\nA greater risk looms as these funds grow. ETFs&nbsp;<a href=\"https:\/\/www.bloomberg.com\/news\/articles\/2017-06-21\/etfs-dirty-little-secret-is-selling-point-for-this-fund-veteran\" target=\"_blank\" rel=\"noreferrer noopener\">habitually<\/a>&nbsp;lend out a proportion of their holdings to hedge funds and other borrowers for a fee, part of which goes back to investors. While the amount of securities that can be out on loan at any given time is capped by the regulators, issuers of zero-fee funds could be incentivized to lend out a larger portion of their underlying portfolios, and keep a larger percentage of the profits.\n\n\n\nWhile no zero-fee ETF currently engages in the practice, Fidelity\u2019s four index funds are eligible for securities lending, according to a company spokesman. But all revenue &#8212; minus lending agent and custodial fees &#8212; goes back to investors. ETFs need about $50 million to make securities lending worthwhile, according to Toroso\u2019s Venuto, who says it\u2019s low risk.\n\n\n\n<a href=\"https:\/\/www.bloomberg.com\/news\/articles\/2019-03-20\/as-cash-back-etf-hits-market-signs-of-trouble-start-to-mount\" target=\"_blank\" rel=\"noreferrer noopener\">Read more: Zero fees could backfire on asset managers<\/a>\n\n\n\nStill, the race to zero shows no sign of letting up. Abolishing fees generates publicity, something that could make the difference between survival and liquidation in a marketplace with more than 2,000 options. More than 70% of U.S. ETF assets are in funds that charge $2 per $1,000 invested or less and 93% of new money has flowed into such products this year, according to data compiled by Bloomberg.\n\n\n\nVanguard Group cut its fees again on Oct. 23, this time&nbsp;<a href=\"https:\/\/www.bloomberg.com\/news\/terminal\/PZU9BU6JIJV2\" target=\"_blank\" rel=\"noreferrer noopener\">announcing<\/a>&nbsp;that it would reduce the cost of 13 London-listed ETFs. Meanwhile, in the U.S., BNY Mellon has filed for a group of broad-indexed ETFs, fueling speculation that these products could augment the growing pool of zero-, or near-zero, fee investments.\n\n\n\n\u201cIf they\u2019re not getting paid by the clients, how are they getting paid?\u201d Dan Egan, managing director of behavioral finance and investing for Betterment, said of zero-fee funds. \u201cPeople who are happy paying nothing for something are going to get what they pay for.\u201d\n\n\n\n<figure class=\"wp-block-image\"><img decoding=\"async\" src=\"https:\/\/bcp.crwdcntrl.net\/map\/c=12392\/tp=BLPI\/tpid=71246908-40f6-4b29-a073-3a4992ce7e02\" alt=\"\"\/><\/figure>\n\n\n\n<figure class=\"wp-block-image\"><img decoding=\"async\" src=\"https:\/\/bcp.crwdcntrl.net\/map\/c=12393\/tp=BLGA\/tpid=UA-11413116-1\" alt=\"\"\/><\/figure>\n","protected":false},"excerpt":{"rendered":"<p>By\u00a0Claire Ballentine&#8211;November 3, 2019, 4:00 AM PST\u00a0Updated on\u00a0November 3, 2019, 8:42 AM PST &nbsp;Funds that charge nothing may come with unappreciated risks &nbsp;But an asset-management fee war means trend is here to stay If something sounds too good to be &hellip; <a href=\"https:\/\/amicuscuria.com\/wordpress\/money-its-a-hit\/\">Continue reading <span class=\"meta-nav\">&rarr;<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-21284","post","type-post","status-publish","format-standard","hentry","category-uncategorized"],"_links":{"self":[{"href":"https:\/\/amicuscuria.com\/wordpress\/wp-json\/wp\/v2\/posts\/21284","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/amicuscuria.com\/wordpress\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/amicuscuria.com\/wordpress\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/amicuscuria.com\/wordpress\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/amicuscuria.com\/wordpress\/wp-json\/wp\/v2\/comments?post=21284"}],"version-history":[{"count":15,"href":"https:\/\/amicuscuria.com\/wordpress\/wp-json\/wp\/v2\/posts\/21284\/revisions"}],"predecessor-version":[{"id":21309,"href":"https:\/\/amicuscuria.com\/wordpress\/wp-json\/wp\/v2\/posts\/21284\/revisions\/21309"}],"wp:attachment":[{"href":"https:\/\/amicuscuria.com\/wordpress\/wp-json\/wp\/v2\/media?parent=21284"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/amicuscuria.com\/wordpress\/wp-json\/wp\/v2\/categories?post=21284"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/amicuscuria.com\/wordpress\/wp-json\/wp\/v2\/tags?post=21284"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}