Alternative Investments: Heart-Searching the End of a Negative Fee ETF

June 18, 2020 | Alternative Investments, News

Despite the data, the expense ratio of an ETF may have little to do with its success.

Salt Financial just sold its Salt Low TruBeta U.S. Market ETF (BATS: LSLT) to Pacer Advisors. The ETF was the first and only negative-fee ETF. Investors received an incentive to invest in it. At the time of its launch in March 2019, the idea of such a fund was a no-brainer because of the relentless fall in fund management fees. Yet, it appears that investors did not find the fund appealing enough. (MarketWatch)

At the time of its sale to Pacer, the Salt Low TruBeta U.S. Market ETF had a tiny $9 million in assets.

In retrospect…it’s not about the fees

Salt co-founder Tony Barchetto weighed in on what went wrong on the fund.

“When we created the fee structure we knew it was a bit radical, but that was the point,” Barchetto said in an interview. “People kept hearing about fees. But it’s more about value than cost, and our experiment showed that.”

Even Todd Rosenbluth, head of ETF and mutual-fund research for CFRA, was taken in by investors’ seeming obsession with low-cost ETFs.

He told MarketWatch that multiple surveys threw up the finding that fees were the most important consideration for investors.

Could it be distribution?

Barchetto also speculated that distribution, a not uncommon problem for small fund houses such as Salt, was the culprit. Without proper distribution, the Salt ETF likely did not reach investors who may be interested.

Small funds are often unable to access distribution platforms that have advisors onboard. Advisors can make a big difference in the marketing of a fund.

Rosenbluth agrees, observing that most such platforms have a minimum AUM threshold for inclusion of a fund. Ironically, a smaller fund can’t raise that AUM unless it is allowed on the platform.

Also, the current thinking is that a fund must have an AUM of at least $50 million to be able to turn a profit.

The alternative: red hot ideas

Given the difficulties, Rosenbluth thinks the smaller, independent fund houses will the going tough unless they “have something real flashy that’s going to make the news.”

“Flashy” is right, going by what happened to the Roundhill Sports Betting & iGaming ETF (NYSEARCA: BETZ) – one of two ETFs launched by fund house Roundhill Investments.

BETZ launched on June 4 and already chalked up assets of $74 million by June 17. The ETF trades heavy volumes – an average of 2 million shares a day since its inception. In proof of how much interest BETZ has garnered from retail interests, it has a position in about 18,000 accounts on Robinhood.

The ETF offers retail and institutional investors exposure to sports betting and iGaming industries.

Its expense ratio?  0.75%.

Related Story:  Pacer Acquires Negative Fee ETF from Salt Financial

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