The first no-fee ETF is coming next year, and it could come from one of these 4 firms

Chris Willcox, head of JPMorgan Asset Management JPMorgan Asset Management
  • The first exchange-traded fund without fees will launch next year, predicts Todd Rosenbluth, the head of ETF and mutual fund research at advisory firm CFRA.
  • Fidelity launched no-fee mutual funds this year, which drew in nearly $US1 billion in flows in their first month.
  • Rosenbluth highlights a few firms that could be the first to zero-fee ETFs, including Invesco and Charles Schwab.

Next year could see the first free exchange traded fund, as fees has ticked to near-zero in recent years, one industry analyst predicts.

Todd Rosenbluth
Todd Rosenbluth, CFRA CFRA

Fidelity made waves this summer by offering the first no-fee mutual funds. Though the products came with a host of restrictions, the first funds attracted nearly $US1 billion in a month.

In the ETF space, 16 US-listed funds now charge 0.04% or even 0.03% fees. Those super-low fee fundsgarnered $US62 billion of capital this year through mid-December – about a quarter of all ETF inflows, according to research firm CFRA. Such strong fund flows could pave the way for a free ETF.

“2019 could be the year, as asset managers saw the brand awareness and asset gathering benefits Fidelity achieved following its zero-fee products,” Todd Rosenbluth, the head of ETF and mutual fund research at CFRA, told Business Insider in an interview. “Further, some firms such were relatively aggressive on the low-fee front in 2018 or late 2017 and could take the logical next step. The race to zero is not a sprint but requires endurance.”

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The five ETF providers most focused on low costs are BlackRock’s iShares, Vanguard, State Street Global Advisors, Invesco, and Schwab, Rosenbluth said. While low- or no-fee ETFs don’t make much money for their managers, the firms could benefit from higher volume and securities lending. Presumably, investors will also tack on less-discounted products, using that investment firm for other parts of their portfolios.

Rosenbluth pointed out that new low-cost ETFs are finding it difficult to stand out in an increasingly crowded space. Invesco, for example, launched a large- and mid-cap-focused ETF in September 2017 with a 0.04% fee. Even though the product has outperformed Schwab’s comparable ETF – which has a 0.03% fee – Invesco has only picked up $US3 million for its fund. Schwab, by contrast, has added $US3 billion of new capital this year. If Invesco cut its fee completely, it could jump start flows, Rosenbluth said.

JPMorgan is another potential zero-fee manager. Industry observers have been speculating about the prospects of no fee for a coming product, the JPMorgan BetaBuilders US Equity ETF. Earlier this month, the firm filed paperwork for the ETF without indicating the fee.

“We think the attention and asset flows that would come with the first zero-fee ETF could help to further catapult JPMorgan, now just outside of the top 10, into the top 5 of ETF asset managers and knock an incumbent back,” Rosenbluth said.

A spokeswoman for JPMorgan declined to comment.

Meanwhile, Schwab – whose president told Business Insider recently that he’s focused on keeping a streamlined product lineup – could remove the small fees on one or two of its products without denting its $US10 billion annual revenue, Rosenbluth said. Instead, the firm “could benefit from increased asset growth and trading volumes.”

“We have learned that while some investors like the idea, others remain sceptical of the concept and prefer to have greater transparency into how they pay their asset manager and their brokerage account provider,” a Schwab spokeswoman said. “We will continue to talk with investors to learn about their preferences, and monitor market activity to inform any future steps we may take – all while making sure we put clients first.”

State Street has already seen the positive impact of fee reduction. The firm cut the fees of its total return ETF to 0.03% in late 2017, then saw $US1.6 billion in new capital this year – still less than a comparable iShares ETF, which pulled in $US3.4 billion. A free fund could help State Street recoup some of its recent market share losses to iShares and Vanguard, Rosenbluth said.

No matter which firm is the first to free, “such a move would certainly shake up the rapidly growing ETF industry and possibly drive further industry inflows,” Rosenbluth said.

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