Free trading commissions aren't surprising anymore. But now underlying ETF fees are plunging to zero — giving investors more low-cost choices with the S&P 500 and beyond.
XInvesco launched two new ETFs, the Nasdaq Biotechnology (IBBQ) and PHLX Semiconductor (SOXQ), on June 11. They are neither the first nor the only ETFs that let you instantly own a portfolio of biotech and semiconductor stocks. But they are the cheapest — free — at least until Dec. 17.
Offering ETFs minus any annual fee is the latest way fund providers are trying to muscle into the crowded industry where a few funds dominate entire categories. There are already more than 2,600 ETFs, says Morningstar Direct.
"New ETF providers have not successfully climbed the league table with a zero-fee ETF, but we think the new Invesco products could be popular," said Todd Rosenbluth, head of ETF and mutual fund research at CFRA. "Like Fidelity, Invesco has a strong brand with index investors and the opportunity to appeal to cost-conscious investors seeking industry exposure."
The Race To Free In ETF Fees Is On
ETFs are known for sporting low annual fees and tax efficiency. But they're not normally completely free.
On average, ETFs charge 0.54% annually. That's low versus many actively managed mutual funds pushing 1%, but will still cost you $54 annually based on an initial $10,000 investment. The fee rises as the amount invested in the fund goes up.
There are other free ETFs, just not many yet. Including the two new Invesco ETFs that charge no fee for six months, there are now six permanently or temporarily free ETFs, Rosenbluth says.
The BNY Mellon US Large Cap Core Equity ETF (BKLC) is the largest free ETF. It launched in April 2020, but hasn't set the world on fire yet. The ETF only has $312 million in assets, so it's not one of the new ETFs to boom to $1 billion in assets in just a few years.
Not helping much is the fact the BNY Mellon US Large Cap Core Equity ETF is lagging the S&P 500 in 2021 so far, even with a zero fee. It's up just 11.3% this year. Meanwhile, the Vanguard S&P 500 ETF (VOO) is up 13% and charges just 0.03% annually.
"Investors have primarily stuck with the more established products like VOO in the past year to build asset allocation strategies rather than the free large-cap alternative," Rosenbluth said.
Invesco Hopes To Build Assets Using Free
Invesco is jumping into an ETF pool with some huge players already in it. Its Invesco Nasdaq Biotechnology ETF is taking on the $11 billion in asset iShares Nasdaq Biotechnology ETF (IBB) juggernaut.
Now, they both track the performance of more than 270 biotechnology firms listed on the Nasdaq Stock market. These biotechnology firms range in size and develop a host of therapies and treatments.
But the two ETFs will part ways in short order. iShares plans to move the Nasdaq Biotechnology ETF to tracking a different index from ICE from and change its name to iShares Biotechnology. But it will still charge 0.46% annually. That's much higher than the 0.19% Invesco plans to charge for its biotech ETF in December.
Invesco also plans to charge 0.19% for its PHLX Semiconductor ETF in December. But that's much less than the 0.46% charged by the $6.6 billion-in-assets iShares PHLX Semiconductor ETF (SOXX).
Do Free ETFs Pay Off Vs. The S&P 500?
Over time on large account balances, even seemingly small savings on fees can pay off big. Skipping a 0.3% annual fee on a $100,00 initial investment in an ETF that returns 9.5% annually leaves you with $1.5 million in 30 years. That's $141,187, or 9%, more than you'd be left with if you paid the fee.
And for some investors, that's compelling. Fidelity offers a number of zero-fee index mutual funds. The largest, Fidelity Zero Total Market Index (FZROX), already lured $10 billion in assets, Rosenbluth said. And yet, one of the first no-fee ETFs from Salt Financial was sold to another provider and now charges a fee.
It simply comes down to this: Know how much and what you're paying for when you own an ETF.
Free ETFs Don't Always Top The S&P 500
| Fund | Symbol | 1-year % ch. | YTD % ch. | AUM ($ millions) |
|---|---|---|---|---|
| BNY Mellon US Large Cap Core Equity | (BKLC) | 34.7% | 11.3% | $312 |
| SoFi Select 500 | (SFY) | 37.0% | 11.6% | 248.9 |
| BNY Mellon Core Bond | (BKAG) | -2.1% | -2.4% | 93.8 |
| SoFi Next 500 | (SFYX) | 44.5% | 13.9% | 34.2 |
| Invesco Nasdaq Biotechnology* | (IBBQ) | n/a | n/a | n/a |
| Invesco PHLX Semiconductor * | (SOXQ) | n/a | n/a | n/a |
| SPDR S&P 500 ETF Trust | (SPY) | 35.0% | 13.0% | $363,680 |
Sources: CFRA, ETF.com, S&P Global Market Intelligence, * — operating fees waived until Dec. 17, 2021
Follow Matt Krantz on Twitter @mattkrantz
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