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Under the hood of SoFi’s no-fee ETFs

Welcome to the brave new world of zero-fee ETFs.

Social Finance, the online lender specializing in student loan refinancing, began trading two new index funds with no-fee waivers, making them essentially free to investors. The San Francisco-based startup already offers personal loans, mortgage loans and term life insurance, among other services.

By offering free investment products, SoFi is hoping to gain significant traction in the ETF market and will likely look to cross-sell other products and services to its customer base, experts say. Clients save basis points on the purchase of an ETF, while the firm hopes to benefit by profiting from other types of product sales.

The new funds mark the firm’s latest foray into traditional wealth management and compete directly with independent robo advisors, like Betterment and Wealthfront, that have traditionally offered low-cost passive investing. Newer automated platforms offered by incumbents, like Merrill Edge, are also part of that competition.

ETF adjustments graph jan 8 2019

Called SoFi Select 500 ETF, the investment product tracks 500 of the largest publicly traded companies in the U.S. and weighs each company based on growth signals, including top-line revenue growth, net income growth and estimates of net income growth. The other fund, SoFi Next 500 ETF, tracks similar signals from 500 mid-cap domestic companies.

The funds will be free of charge until at least June 2020, according to SEC filings. Both SoFi Next 500 and SoFi Select 500 each have approximately $1 million in client assets, according to Morningstar.

There are some potential challenges for clients looking to access capital markets without paying a fee, experts say. For one, the no-fee investment products may encourage more active investing — especially by inexperienced investors — leading to imbalanced portfolios, says Vijay Raghavan, an analyst with Forrester.

“The allure of free investing sounds nice,” Raghavan says, “until investors realize they are in over their heads.”

SoFi didn’t respond to a request for additional information.

Health category funds dominated the list, making up for well over half of the group’s assets.
December 5

Founded in 2011, the firm recently launched SoFi Invest, a platform that offers both brokerage and robo-advisor investment tools with no commissions or management fees. The firm’s ETFs will be available through SoFi Invest, as well as other brokerage accounts.

Passively managed funds continued to gain ground on active ones last year, according to data from Morningstar. Investors pulled a massive $301 billion from active funds in 2018, while passive funds reported inflows of $458 billion. At the end of last year, passive investment products had an overall market share of 38.8% — up two percentage points from the same period a year ago.

The average ETF charges $4.70 per $1,000 invested, but some that track broad U.S. equity indexes now charge as little as 30 or 40 cents, according to Bloomberg. In fact, more than 97% of cash flowing into ETFs goes to those that charge 20 basis points or less, according to Bloomberg.

The crowded ETF marketplace now has more than 2,000 options.

However, in the competitive marketplace of index funds even free products might not be the end of the race to zero. Salt Financial, which currently runs a $10 million ETF, plans to actually pay clients to invest in its funds, according to regulatory filings reviewed by Bloomberg. During the first year, holders will receive 50 cents for every $1,000 in a new low-volatility stock ETF.

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