Why zero fee ETFs aren’t worth the price

London, 28 March, 2019

The last decade has seen price wars intensify among ETF providers, but zero-fee ETFs are simply a gimmick and should be avoided, according to Hector McNeil, co-CEO of HANetf.

Passive providers have increasingly cut prices in a bid to undercut each over the past few years with ETFs in the UK carrying fees of well below 10 basis points as the norm. Additionally, last year we saw the launch of a zero-fee index fund in the US as providers race to the bottom on charges.

However, while they may initially seem appealing, ETFs with no charges will actually put the investor at a disadvantage, McNeil says.

“It’s worth remembering zero fund fees are a misnomer – it’s like when you apply for a mortgage and see all the special offers, but when you look at the small print you see all sorts of clauses.

“Essentially, it’s just a gimmick to get people on to a given platform to start with.”

This, he says, is the point when investors tend to be stung with hidden drawbacks.

“It’s not good for the end consumer because price should only be one factor when making an investment choice. For example, while you may pay zero fees for one tracker, you may have to shift your money on to a specific platform, which could cost more money and leave you out of the market for a significant period of time. Furthermore, there is the risk that you may also then find you have a limited choice of other funds or products (assuming you do not only buy the single, zero-fee tracker).

“Investors should assess whether the cost and hassle of moving is worth what will be, in all likelihood, a very miniscule saving versus other ETFs.”

He adds zero-fee ETFs are not a new tactic with some being launched as far back as 2007 but later quietly dropped by the provider.

“You may well see more firms do such gimmicks as this, but for us, that is precisely what it is, and investors need to be wary.”

He also said the European market is quite different from the US market, where passives have taken a much larger market share, and therefore, takes comfort that it is unlikely zero-fee products, should they be launched here in the first place, would be well-received.

“It will be harder for this to take root in Europe because it is more competitive here, with far more indices to monitor and focus on. The audience is also far less ‘retail’ than the US.”

Hector McNeil is a veteran in the ETF industry. He set-up HANetf in 2017, with co-CEO Nik Bienkowski, his fourth ETF business, having also helped establish Susquehanna’s ETF desk in Europe as head of business development.

He also co-founded ETF Securities before moving on to found BoostETP with Bienkowski in 2011.