Asset management companies (AMCs) and fund houses invest your money on your behalf when you opt for exchange-traded funds (ETFs) or mutual funds. However, you might have noticed that the AMCs and fund houses will generally have an expense ratio that will be charged when you buy an ETF. This money will be used by the AMC or the fund house to cover administrative expenses, overheads, and other costs.
However, there also exists ETFs where investors do not pay any extra fees! Read on to know more.
What is a no-fee ETF?
An exchange-traded fund (ETF) consists of a basket of securities that seeks to imitate the movement of benchmark indices that represent the broad market or a particular sector. While you get returns similar to the benchmark index by investing in ETFs, the advantage that ETFs provide over mutual funds is that ETFs can be traded on stock exchanges at dynamic prices just like any other ordinary stock. Note that mutual funds are traded only at the NAV (net asset value) price decided at the end of the trading session.
Generally, ETF investments come with additional costs such as transaction fees when it is traded in the market. In addition, you would have to pay a fee that includes administrative costs (taken out of either the fund’s assets or stock dividends).
However, many brokerage houses have recently been offering their buyers an opportunity to buy and sell no-fee ETFs. As the name suggests, a no-fee ETF is an ETF that enables investors to buy and sell it without paying any fees or commission to a brokerage house. Fund houses have adopted this strategy to remain competitive and attract more investors.
The source of income for zero-fee ETFs comes from lending stock to clients, offering low-interest rates on cash funds, or selling other products. The intention behind charging zero fees on ETFs motivates clients to open accounts with the new broker. Brokers hope to capture new clients by offering to complete ETF trades for free and then proceed to conduct profitable transactions with them in the future as well.
No-cost ETFs are an attractive deal for investors irrespective of the time horizon of investment – those who trade frequently and day traders too may explore this option as they no longer need to incur a substantial expense due to trading. If you wish to understand more about whether ETFs are a suitable investment strategy for your needs, reach out to a professional financial advisor who can clear up your doubts and offer better insight to you.
That said, most stock market-related investments tend to perform better over the long term through the power of compounding. The longer you remain invested, the more are the chances of riding out short-term volatility, and the more are your chances of earning good returns from your equity investments.
Below are the list of no-fee ETFs you could consider investing in:
1. The BNY Mellon US Large-Cap ETF
The BNY Mellon US Large Cap Core Equity ETF consists of approximately 230 holdings in its basket of high-quality stocks. It follows a similar movement as that of the Morningstar U.S Large Cap Index, which tracks most of the large-cap companies in the U.S. This fund is passively managed and performs reasonably well in tracking the Morningstar Index, although the percentage of holdings might vary. This fund does not follow the ESG (Environmental, Social and Governance) criteria to select the stocks to add to the fund; it mainly focuses on the market cap of companies. Therefore, if you are looking for an ETF that invests in big-name stocks such as Apple Inc. (AAPL), Amazon Inc. (AMZN) and Microsoft Corp (MSFT), and which has a low-cost exposure, then this ETF may be an excellent option to consider.
2. SoFi Select 500 ETF (SFY)
This fund focuses primarily on the large-cap companies in the U.S. It mimics the movement of the largest 500 companies publicly listed on the exchange. Instead of allocating funds to different stocks based on their size, this ETF looks at three growth measures – revenue, sales, and future growth. Companies with higher average scores on all these three parameters are given a higher weightage in the ETF fund.
3. The SoFi Next 500 (SFYX)
The SFYX fund includes 500 mid-cap companies in the U.S., which are screened according to three parameters: forward-looking estimated growth prospects, sales growth, and revenue growth. This overall growth measure decides the weightage of all stocks the fund invests in. It is a well-diversified portfolio with the largest weightage of 1.51% given to Datadog Inc (DDOG). This ETF is also removing the 0.19% expense ratio that it used to charge. However, it must be kept in mind that this fund is better suited for long-term investors who have a relatively high-risk appetite and aim for high returns.
4. BNY Mellon Core Bond ETF (BKAG)
If you were unaware, zero-cost ETFs are also available in the fixed income asset sector! The BNY Mellon Core Bond ETF is one such example. This fund mimics the movement of the Bloomberg U.S Aggregate Total Return Index, thus providing the investors broad exposure to the US bond market with 1,840 holdings. It pays monthly distributions to the investor and has a current yield of 1.65%. Since most of its holdings include Treasury bonds instead of corporate bonds, this fund is more conservative than intermediate-term bonds. Up to 70% of the fund amount is invested in AAA-rated bonds. Any bond which carries a rating below BBB is not included in the fund.
5. Gabelli Love Our Planet & People ETF (LOPP)
Sustainable development is the latest niche where many investors are putting their money simply due to the urgent need to support environmental causes and promote sustainable growth. Gabelli Love Our Planet & People ETF is a newly launched sustainable investment ETF that has been available from January 2021. Investors looking for impact investing or sustainable investing can consider this ETF. The stocks included in this fund consist of those companies that focus on the ESG criterion’s environmental component. The chosen companies must be following sustainable practices such as waste reduction, recycling, clean mobility and renewable energy. The LOPP fund allocates at least 80% of the amount towards such companies. The fund’s advisor has declared waiving off expense ratio applicable on the first $100 million investment for at least a year. Only $11.2 million has been invested; thus, it may be an excellent opportunity to invest in this fund.
6. The Invesco Nasdaq Biotechnology ETF
This ETF fund tracks the Nasdaq Biotechnology Index, which consists of listed companies from the biotechnology and pharmaceuticals sector. There is no specific size that this fund represents as all the stocks belong to large, mid and small-cap companies. The fund amount is entirely invested in the healthcare segment. It includes holdings of top companies like Moderna Inc. and Gilead Sciences Inc. The liquidity of this fund is low due to its low trading volume, with only around 18,000 shares trading per day.
7. Invesco PHLX Semiconductor ETF (SOXQ)
This fund holds 30 of the largest companies involved in the semiconductor business that are listed in the U.S. It is waiving off 0.19% of its expense ratio. The companies held in this fund include Nvidia Corp, Qualcomm Inc, Broadcom Inc., Texas Instruments Inc and Intel Corp. Like the IBBQ fund, SOXQ also needs attention since it trades only 30000 times per day and has fewer assets under management.
What are the downsides to no-fee ETFs?
Although no-Fee ETFs do come as a blessing for investors since they help save avoidable expenses on investments, it is not free from drawbacks. The zero-fee ETFs are not essentially free of cost. Since the AMC needs to pay fund managers and administrative costs, they get the required money from selling other products, lending assets or reducing client benefits.
A primary disadvantage with investing in zero-fee ETFs is the lack of other options. Since most of these ETFs track the broad market indices, investors are automatically limited to investing only in particular stocks. Under some zero-fee ETF deals, investors might have an arrangement with a specific asset manager and thus have limited fund options to try.
Other drawbacks include tempting investors to trade excessively. According to some behavioral analysts, waiving off costs to invest in ETFs motivates investors to trade more. Numerous studies back up that trading very frequently can lead to deteriorated performance. Frequent trading also raises tax bills as positions that are held for less than a year are regarded as ordinary income.
Introducing no-fee ETFs is a good step to encourage investment activity in the market and an opportunity for investors to earn significant profits. However, investors should consider that these funds are not free of risks and trade accordingly. They should also ensure not to trade too frequently just because there is no fee levied on that particular ETF.
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