New ETF goes a step beyond zero-fees and is paying people to invest

Key Points
  • One firm is turning up the heat on the no-fee ETF battle with negative fees.
  • Salt Financial filed with the SEC Tuesday to introduce an exchange traded fund that will temporarily pay people to invest.
  • The ETF environment is increasingly competitive as BlackRock and Vanguard continue to cut fees, and new entrants like SoFi tout zero-fee funds.

One fund is going a step further in the race to zero-fee ETFs by paying investors to put money into its new exchange traded fund.

Salt Financial filed with the Securities and Exchange Commission on Tuesday to introduce an ETF that will temporarily pay people to invest for at least the first year. The less-than two-year-old firm already runs a $10 million ETF called the Salt High Trubeta US Market ETF (SLT).

Salt's plan comes in an increasingly competitive ETF backdrop with thousands of options. Incumbents like BlackRock, Vanguard and Charles Schwab have continued to slash fees, while new entrants like Social Financial, which is the lending site called SoFi, have started out at zero.

This week, J.P. Morgan announced its lowest-fee ETF yet, with a 0.02 percent fee. BlackRock's iShares and Charles Schwab had been the lowest for broad U.S. equity exposure at 0.03 percent fees each, while Vanguard Group's broad U.S. stock market ETF charges 0.04 percent.

Salt's rate is temporary, though, and the kickbacks are small. The firm has pledged to pay 0.05 percent of assets to the ETF but only on the first $100 million under management until April 2020. For example, investors will get 50 cents back on every $1,000 sitting in the fund. Once the fund grows to $100 million, the cash-kickback will be capped and shared with buyers. Once the ETF passes that April 2020 date or crosses the $100 million level, whichever comes first, it will charge 0.29 percent.

Salt Financial's Low TruBeta US Market ETF, which would trade under the ticker "LSLT" plans to track an index of about 100 low-volatility stocks.

Todd Rosenbluth, head of ETF and mutual fund research at CFRA, said that fact that the Salt High truBeta US Market Fund has attracted only $10 million since launching last May, at a fee of 29 basis points, helps explain the decision on the new ETF. Any ETF that can't gather $100 million or more will not show up on the screens of most investors and financial advisors, or make it onto brokerage platforms.

"It shows the challenges they face getting more money in the door. It highlights how aggressive asset managers need to be. The bar keeps moving lower," Rosenbluth said. "This can help to get them over the hump of $100 million."

ETFs with fees as low as 10 basis points have recently shut down for lack of investor interest. Firms have been forced to differentiate.

"When SoFi came out with plans for the zero-fee ETF I said, 'If you're going to crash an ETF party dominated by a handful of firms you need to make a splash,'" he said. "I thought zero-fee was how to make a splash, but the bar has moved lower."

Ben Johnson, director of passive strategies for North America at Morningstar Research Services, noted in a tweet on Tuesday that J.P. Morgan's plan to launch a core U.S. stock ETF at two basis points would save an investor with $10,000 already in a three-basis point ETF all of $1 a year.

Salt Financial's filing indicates that the new ETF will track an index it creates, and self-indexing can save fund issuers money, which is more important when fees are low, or in this case, negative. But that also means investors are tracking an index that is not from a major index company, like the S&P 500.

An index can deviate from the S&P 500 by a significant amount — either outperforming or under-performing — and that deviation can be greater than the fee differential versus other funds. Investors need to have confidence they will be on the right side of that performance deviation to be confident that the lower fee is the most important factor in selecting an ETF.

"Investors should want to understand what they are owning. A good deal is not the same as an appropriate investment," Rosenbluth said.