Vanguard effect? SoFi launches 'free’ ETF as fee war flares among brokers

Anyone paying down student loans may recognize the name SoFi from ubiquitous mailers and Super Bowl ads.

Hark, investors: SoFi just jumped into the money management business — and Wall Street is freaking out. SoFi, short for Social Finance Inc., last week disclosed it will offer what it dubbed the first free ETF, or exchange-traded fund.

Not exactly free; the SoFi ETF’s 0.19 percent management fee will be waived until March 2020, and then, well, we’ll see.

There aren’t many details yet, since the SoFi ETFs are still in registration with the Securities and Exchange Commission. What we know: ETFs track a stock index or some other group of assets. And the SoFI ETFs’ adviser is Toroso Investments, which runs the $7 million ETF Industry Exposure and Financial Services ETF (TETF). Toroso’s chief investment officer is Michael Venuto, who also is managing director for Tidal Growth Consultants, the funds’ administrator.

The new SoFi 500 ETF (ticker: SFY) and SoFi Next 500 ETF (SFYX) will be followed by the SoFi Top 50 and Gig Economy ETF (proposed symbol: GIGE), according to company officials.

This ongoing race to the bottom on fees is chiefly due to the cost-cutting by Malvern-based fund giant Vanguard, which competes with Fidelity and Charles Schwab. Newcomers such as SoFi, which started as a student loan refinancer, have embraced the Wall Street fee wars. SoFi has also branched into personal loans and now asset management and brokerage, although as a start-up it’s tiny compared to the $5 trillion-plus assets in Vanguard.

The trend is good for investors because they pay over time and maximize returns. Research has shown that high fees can cripple returns over the long term.

For a look at how fees have come down, last week Vanguard disclosed that it has cut fees on an additional slew of ETFs and mutual funds, according to regulatory filings.

Vanguard shareholders won fee cuts on several funds last year, with the biggest cut, from 0.07 percent to 0.05 percent, coming on Developed Markets ETF (VEA).

A significant cut: Total Bond Market ETF (BND) expense ratio dropped from 0.05 percent to 0.035 percent, matching the expense paid by institutional investors, who must meet a minimum $5 million to buy the “institutional” share class (VBTIX) of the fund.

Total Bond Market ETF is now the cheapest U.S. bond fund available, lower than comparable funds: SPDR Portfolio Aggregate Bond ETF carries an expense ratio of 0.04 percent, and iShares Core U.S. Aggregate Bond ETF maintains an expense ratio of 0.05 percent.

Vanguard S&P 500 ETF will have an expense ratio of 0.03 percent, making it cheaper than iShares Core S&P 500 ETF and well below SPDR S&P 500 ETF Trust. Vanguard Total Stock Market ETF will also lower its expense ratio to 0.03 percent, according to Bloomberg ETF analyst Eric Balchunas.

One fund, Vanguard’s Market Neutral (VMNFX) saw its expenses rise by 0.26 percent, from 1.54 percent to 1.80 percent.

In a 2018 annual report, Vanguard disclosed that the new expense ratio for SPX is higher than IVV (0.03 percent vs 0.04 percent).

Overall, fee wars continue raging.

Investors currently pay 30 cents for every $1,000 invested in ETFs from BlackRock, State Street, and Charles Schwab, which account for 60 percent of the $3.7 trillion U.S. ETF market. Vanguard Group controls 26 percent of the market.

SoFi’s target customers are young, successful graduates who are good credit risks, and now SoFi is offering them a suite of savings tools. The start-up also jumped on the broader industry trend, which is to build ETFs based on large-cap U.S. core index funds, with fees in the low double or single-digit percentage fees, what Wall Street has dubbed “the Vanguard effect.”

We heard Vanguard will stop sending paper copies of annual and semiannual reports beginning in 2021 unless you specifically ask for them, a cost-cutting move that other fund companies have already started, said Dan Wiener, editor of the Independent Adviser newsletter.