Reduce costs with zero expense ratio ETFs

Whenever you invest in something, you can never know in advance what your returns will be, but you can always know what it will cost you.

In a mutual fund and an exchange-traded fund (ETF), the primary cost to the investor is the expense ratio. The expense ratio is the fees charged by the fund company to manage the fund. In a mutual fund, fees cover the costs of the investment adviser, the administrator of fund operations, the transfer agent who executes shareholder transactions and maintains the records, the custodian who holds the assets of the funds and the independent accountant.

In 1996, the average expense ratio for equity mutual funds was 1.04% and for bond mutual funds, 0.84%. By 2020, that figure had fallen to 0.5% for equity funds and 0.42% for bond funds, according to the Investment Company Institute (ICI), the fund industry’s trade group.

In 2019, mutual fund giant Fidelity Investments shocked the market by launching the first mutual funds with a zero expense ratio.

For stocks, the zero-fee moment came during the first year of the Covid-19 pandemic when an explosion of DIY retail investors flocked to discount brokerages offering commission-free trading, like Robinhood (HOOD ), although it has been offering them since 2013.

Meanwhile, in the ETF industry, there has been a similar race to the bottom, as fund companies continue to cut fees in order to attract more customers. ETFs typically charge lower expense ratios than mutual funds because they don’t have as many expenses, like the transfer agent, and have greater competition and economies of scale.

The average expense ratio for index equity ETFs was 0.18% in 2020, down from 0.34% in 2009, according to HERE. Expense ratios for index bond ETFs fell to 0.13% in 2020, from a recent peak of 0.26% in 2013. It was only a matter of time before ETF companies began to offer funds with a 0% expense ratio.

Currently, six ETFs charge no expense ratio, according to the ETF Database.

The BNY Mellon US Large Cap Core Equity ETF (BKLC

BKLC
) holds 228 stocks and tracks an index similar to the S&P 500. Compare that with the SPDR S&P 500 ETF (SPY

P.Y.

TO SPY
), the largest ETF to track the S&P 500 index. It charges an expense ratio of 0.095%.

The BNY Mellon Core Bond ETF offers broad exposure to the US bond market and seeks to match the performance of the Bloomberg Barclays US Aggregate Total Return Index. This index is also tracked by the iShares Core US Aggregate Bond ETF (AGG

AGG
), which charges an expense ratio of 0.04%.

The SoFi Select 500 ETF (SFY) is also similar to the S&P 500 Growth Index in that it is comprised of the 500 largest publicly traded US companies. However, the fund tracks the Solactive SoFi US 500 Growth Index and weights each company based on three key growth signals, not just market cap. This is similar to the iShares S&P 500 Growth ETF (IVW

IVW
) which charges 0.18%

The SoFi Next 500 ETF (SFYX

FYX

SFYX
) tracks the Solactive SoFi US Next 500 Growth Index, which is comprised of 500 mid-cap US companies weighted not only by market capitalization, but also by three growth signals. It is a fund similar to the SPDR S&P MIDCAP 400 ETF (MDY

MDY
), which charges 0.22%.

The latter two are exchange-traded notes (ETNs), which do not hold the securities of an index, but are unsecured debt instruments that promise to pay the return of an underlying index minus the expense ratio. .

The Pacer iPath Gold ETN (GBUG), which seeks to track the performance of the Barclays Gold 3-Month Index Total-Return; and the iPath Silver ETN (SBUG), which tracks the Barclays Silver 3 Month Index Total Return.