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Are zero fee ETFs a good idea for investors?

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The last decade has seen price wars intensify among ETF providers, but zero-fee ETFs are simply a gimmick and should be avoided, according to Hector McNeil, co-CEO of HANetf.

Will zero fee ETFs be good news for investors?

Passive providers have increasingly cut prices in a bid to undercut each over the past few years with ETFs in the UK carrying fees of well below 10 basis points as the norm. Additionally, last year we saw the launch of a zero-fee index fund in the US as providers raced to the bottom on charges. Is this good news for the consumer?

While they may initially seem appealing, ETFs with no charges will actually put the investor at a disadvantage, McNeil says.

“It’s worth remembering zero fund fees are a misnomer – it’s like when you apply for a mortgage and see all the special offers, but when you look at the small print you see all sorts of clauses. Essentially, it’s just a gimmick to get people on to a given platform to start with.”

This, he says, is the point when investors tend to be stung with hidden drawbacks. It’s not good for the end consumer because price should only be one factor when making an investment choice. For example, while you may pay zero fees for one tracker, you may have to shift your money on to a specific platform, which could cost more money and leave you out of the market for a significant period of time.

Furthermore, there is the risk that you may also then find you have a limited choice of other funds or products (assuming you do not only buy the single, zero-fee tracker).

Assess the cost of ETF fee arbitrage

Investors should assess whether the cost and hassle of moving is worth what will be, in all likelihood, a very miniscule saving versus other ETFs.

McNeil says zero-fee ETFs are not a new tactic, with some being launched as far back as 2007 but later quietly dropped by the provider.

“You may well see more firms do such gimmicks as this, but for us, that is precisely what it is, and investors need to be wary,” he explains.

He also said the European market is quite different from the US market, where passive funds like ETFs have taken a much larger market share, and therefore, he takes comfort that it is unlikely zero-fee products, should they be launched here in the first place, would be well-received.

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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