BNY Mellon has been a player in the ETF industry for years, however until just recently, it was always a 'behind the scenes' player. In early April, the Bank of New York Mellon changed that in a big way by not only introducing three brand new ETFs but offering one of them to clients for free.
Yes, you read that correctly, the BNY Mellon US Large Cap Core Equity ETF (BKLC) has an expense ratio of zero. The fund doesn't charge you anything to own it. Furthermore, the Bank's two other ETFs come with extremely low fees, 0.04% for each of them.
The BNY Mellon US Mid Cap Core Equity ETF (BKMC) and the BNY Mellon US Small Cap Core Equity ETF (BKSE). Both fall in the top 1% of lowest funds when based on expense ratio, and that's while the BNY Mellon US Large Cap Core Equity ETF was technically the first ETF to offer a zero-expense ratio. Since the launch of these three funds on April 9th, BNY Mello has also launched a few other ETFs, all of which have low fees but one other that doesn't have any, the BNY Mello Core Bond ETF (BKAG).
You may be wondering about another ETF that has been touted as a zero-fee ETF or the first free ETF, it's the SoFi Select 500 ETF (SFY) and the SoFi Next 500 ETF (SFYX) however while they don't currently have an expense ratio, they could in the future. The reason for that is because the SoFi products have a fee reducing waiver, which would need to be renewed for the fund to maintain its zero-fee long term.
The two BNY Mellon ETFs that don't have fees today also don't have any waivers that need to be 'renewed' to keep them free for investors for years to come.
The industry has been moving to this point for some time, as fees across the board for ETFs have been dropping. So it was just a matter of time until someone came along and hit the zero-fee mark. Now that, that card has been played, it wouldn't be a surprise to see other firms come in and join the free ETF party, however, don't expect anything special from these zero-fee ETFs.
The BNY Mellon Large Cap Core Equity ETF is essentially just a plain vanilla S&P 500 Index ETF. Which there is absolutely nothing wrong with that, it just doesn't have any fancy frills or money management strategy attached to it. It is merely going to track the performance of the top 70% of US companies.
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The reason BNY Mellon can offer this product for free is that it is rather easy to set-up a fund that tracks say the S&P 500 or the top 70% of US companies and let it ride on autopilot.
These funds will not have anyone taking a high salary or commission for handpicking stocks that should be in the fund based on different metrics. That is not to say the BNY Mellon US Large Cap Core Equity Fund is a bad one or that funds with money managers stock picking are better or worse. They are just different. Part of that difference is the more or less human intervention, the cheaper or more expensive the fund is going to be to own.
Furthermore, BNY Mellon is likely offering these two funds at zero expense ratio not simply out of the goodness of their hearts, but as a way to work their way into different people's pockets For example, BNY Mellon may go to a company 401(K) plan administrator or any other large institutional investor and say look we have some good funds we can offer you, two of them are free. In contrast, all the others have very low, reasonable expense ratios. The goal is to get people to join the BNY Mellon' family' by attracting them with the 'no fee' ETF, and then getting paid by selling them the other products. It is a good strategy and one that will likely work for BNY Mellon since they are the first ones to do it.
As for individual investors, you and I, we make out great on the whole thing because we can buy the BNY Mellon ETFs and pay no fees, but never get pulled into their 'family' of other products if we don't want to. While cynical parts of us will also look and try to find negatives to lower fees and try to understand how and why someone would offer something for free, the fact of the matter is the financial industry has been heading in this direction for decades. Ever since the late great Jack Bogle started offering lower fees at Vanguard, we have slowly seen fees and expenses come down. In 2019 we saw trading commissions disappear. Now we see ETF expense ratios disappear. This is a good thing for both investors and businesses that operate in the industry.
Matt Thalman
INO.com Contributor - ETFs
Follow me on Twitter @mthalman5513
Disclosure: This contributor held long positions in Apple, Tesla, Intel, Google, Amazon.com, Facebook, Priceline and Microsoft at the time this blog post was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.
