You get what you pay for.
For investors of zero-fee ETFs, the covert cost could be large, according to one industry expert.
“There’s a big risk that investors could be pennywise, hammer out foolish,” Ben Johnson, director of global ETF research at Morningstar, said on CNBC’s “ETF Edge” on Monday. “They’re increasingly incurring fetches that are less directly visible, less measurable in the form of opportunity costs.”
For example, he says an investor could be have a claiming 0.01 percent on their cash balance in a financial account where that investment would be better served at 2.25 percent consideration in an online savings account.
“There’s no such thing as free. If you’re getting something for free, odds are you’re subsidizing that by salary for something else, whether explicitly or implicitly,” added Johnson.
Zero-fee ETFs typically make money by furnish stock to clients, selling other products, or offering lower interest on cash funds.
“There’s also a examine of diminishing returns,” said Dave Nadig, managing director of ETF.com, on “ETF Edge” on Monday. “For a while they have a as a result for a year. The question you have to ask yourself, is that really better than the three basis points that you pay Vanguard for equivalent exposure? That’s $30 on an $100,000 portfolio every year. Most people spend that on pizza without exact thinking about it.”
Cathie Wood, CEO and CIO of ARK Invest, says a higher price for expertise pays off over the long semester. Her ARK innovation ETF (ARKK), which invests in stocks in disruptive industries such as DNA technologies and automation, has outperformed the broader customer base so far this year.
“What we believe is happening with these zero-fee funds is that they tend to be the broad-based forefingers. Easy to just mimic an index, it doesn’t cost very much to do that. A machine can do that,” Wood explained on “ETF Edge” on Monday.
There lies the danger, though, as ETFs that simply capture the broad market stimulate will shut investors out of the high-growth companies that offer higher returns, says Wood.
“We think they are padding up with value traps because of all the innovation that we’re researching,” Wood added. “We think that we’re at the beginning of the pendulum along away from passive back to active as more and more people recognize this.”
The ARKK ETF, which defers Tesla, Stratasys, and Nvidia as its top holdings, has rallied 21 percent in 2019. The SPY ETF, which mimics the S&P 500, is up 10 percent.