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A certain brokerage claims to offer several zero expense ratio index mutual funds.

My cynicism says that this is one of:

  • a loss leader
  • very temporary; the expense ratio will increase, possibly by a lot, and soon
  • a scam, i.e. there's some other way they drain money from those who purchase the funds

Is there a sustainable way that such funds can be offered, with the provider making some kind of profit (so they'll keep doing it), and presumably trying to make up on volume what they lose on price?

Arlie Stephens
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2 Answers2

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I googled for one example SoFi Select 500 ETF

Low cost We’ve waived management fees* on our SFY ETF so more of your money is invested in the market.

looking in the fine print:

The Fund’s investment adviser, has agreed to waive its Management Fees for the Fund until at least June 30, 2023.

It also includes this comment: (I added the bolding)

There is no guarantee that the Fund’s investment strategy will be successful, investments in REITs involved unique risks. Securities in the real estate sector are subject to the risk that the value of their underlying real estate may go down. Shares may trade at a premium or discount to their NAV in the secondary market and fund’s holdings and returns may deviate from those of its index. These variations may be greater when markets are volatile or subject to unusual conditions. A high portfolio turnover rate increases transactions costs, which may increase the Fund’s expenses. The Fund is new and has a limited operating history. The Fund is passively managed and attempts to mirror the composition and performance of the Solactive SoFi US 500 Growth Index. The Fund’s returns may not match due to expenses incurred by the Fund or lack of precise correlation with the index. You can lose money on your investment in the Fund. Please see the prospectus for a discussion of the Fund’s risks.

Note the fund is new, and there are other expenses besides the management fee.

mhoran_psprep
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In the case of Fidelity, these funds are indeed loss leaders (see quote from a third-hand source).

Note that while they do have several zero-cost funds, they don't have a wide selection covering all assets classes (e.g. there are no zero-cost bond funds). The intent is to draw customers in with these "free" investments with the expectation that they will round out their portfolio with other funds that do charge a fee.

Also note that these funds can only be held in Fidelity accounts; if you want to transfer your investments to another brokerage, you'll have to sell off all the ZERO funds first, which creates at least a bit of a barrier for customer attrition.

yoozer8
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