Weekend Sleuth: Could No-Cost Funds Be the Future of ETFs?
Sat, December 12, 2009 10:30:13 AMFrom: Penny Sleuth <pennysleuth@agorafinancial.com> Add to Contacts
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Weekend Sleuth: Could No-Cost Funds
Be the Future of ETFs?
By Jonas Elmerraji
December 12, 2009
The writing’s on the wall for the ETF world: investors are sick of paying for them. There are two main charges that investors in exchange-traded funds (ETFs) generally face — a brokerage commission and a management fee. But those fees could be a thing of the past… with a catch. Now, two fund families are looking to change the way ETFs charge their investors.
ETFs are an incredibly popular investment for good reason — they’re flexible, they’re accessible, and they offer tax advantages that beat out traditional mutual funds. That popularity has caused the number of ETFs on the market to balloon to nearly 800 as of October. That’s an 11% increase since last year despite the fact that 2008 was a market that few funds were willing to launch in.
That number doesn’t count the countless funds that folded in the last year amid a lack of investor interest. Simply put, there are just too many exchange-traded funds out there right now.
But Old Mutual wasn’t concerned as they launched their first foray into ETFs this past week. The firm’s GlobalShares FTSE Emerging Markets Fund (NYSE: GSR) launched on Tuesday to a warm reception from investors thanks to a creative fee structure — it isn’t charging anything to manage the fund.
That’s right, the fund’s expenses currently sit at 0%, at least until January 31, 2010. After its introductory teaser period, the fee jumps to a still competitive 0.39%. So, why the teaser rate? A fee-free fund lures bargain conscious investors who are willing to sink funds into an ETF whose fees won’t take as big of a bit of their investment gains, giving the fund better liquidity, a more accurate share price, and a smaller chance of folding.
Discount broker Charles Schwab (NASDAQ: SCHW) is offering a similar price cut with its newly launched ETF family. Schwab brokerage customers don’t pay trading commissions when they buy or sell the firm’s funds. Instead, they focus their sights on similarly modest management fees.
It’s anybody’s guess whether offering breaks from fees will become the norm in the ETF world — after all, those expense cuts certainly don’t mean that any given fund will have better performance that another. But the trend is definitely one that smart investors will keep their eyes on…
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Comment or question about an article? Just click on any article’s title above and join the conversation by leaving a comment...
We’ll be back on Monday with a brand new Penny Stock Watchlist — and yet another chance for you to put your stock picking skills to work...
Until then, please send me any editorial comments or suggestions at editor@pennysleuth.com.
Enjoy your weekend,
Jonas Elmerraji
Managing Editor, Penny Sleuth
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