BNY Mellon, the world’s largest custodial bank, has kicked off its opening ceremony as an ETF provider with the launch of a free ETF.

As part of its 11th hour foray into the ultra-competitive US core ETF market, BNY is providing an S&P 500-equivalent ETF at a zero fee. A core bond ETF is scheduled to list at a later date, also with a zero fee.

Core US ETFs are now very cheap

TickerFund NameExpense RatioSecurities Lending Split (Fund/Issuer)
BKLCBNY Mellon US Large Cap Core Equity ETF0.00%100/0
BBUSJPMorgan BetaBuilders U.S. Equity ETF0.02%?
VOOVanguard S&P 500 ETF0.03%100/0
VTIVanguard Total Stock Market ETF0.03%100/0
ITOTiShares Core S&P Total U.S. Stock Market ETF0.03%71/29
SCHXSchwab U.S. Large-Cap ETF0.03%100/0

Source: ETF.com, ETF Stream

According to the fund’s legal documents, BNY Mellon "will pay substantially all the expenses of the fund". This makes it the first of a kind and distinguishes BNY Mellon from other companies which have launched “free” ETFs – such as SoFi’s SFY and Salt Financial’s LSLT – but with temporary fee waivers, which were later removed.

Other funds take fees in other, subtler, ways. For example, through securities lending revenue. When ETFs lend out the securities that they hold to short sellers they charge rental fees. Some ETF providers give all the lending revenue to investors, while other ETF providers take a cut (in effect, a fee). BKLC will give all its securities lending revenue back to investors, the prospectus indicates.

BKLC will track a Morningstar index of the 500 largest American companies – much like the S&P 500. BNY Mellon avoided using the official index as S&P Global charges basis points to use its brand name index. This made using the official index incompatible with the company's mission to provide free ETFs.

It was unclear what deal was struck on index license fees, and whether BNY Mellon eats them or whether Morningstar waives them.

Some ETFs look freer than they are

TickerFund NameNominal feeAfter waiver expires
SFYSoFi Select 500 ETF0.00%0.19%
LSLTSalt Low truBeta US Market ETF0.00%0.29%

According to Stephanie Pierce, head of ETFs at BNY Mellon, the motivation for listing free ETFs was to stand out in a crowded market.

“We wanted to give our clients an experience they couldn’t get elsewhere,” she said.

She added that despite US core ETFs already being extremely cheap, the company felt that expense ratio was still the best distinction to offer.

BNY Mellon had originally planned for its new free ETFs to go live in early March. However, the listings were delayed by four weeks in order to avoid the worst of the coronavirus volatility.

Pierce said the company did not want to list a fund while the costs of buying and selling ETFs – known as “spreads” – were some of the widest in history.

With the listing of a new ETF always comes the question of who will buy into it, and where the fund will gather assets from.

When enormous financial institutions – such as JP Morgan – list ETFs late in the game, it is sometimes suggested that their strategy is to cannibalise assets from other parts of their business. This practice is called “bring your own assets”, or BYOA.

Pierce said it was possible BNY Mellon would BYOA but added that allocation decisions were made separately, by other parts of BNY Mellon’s business.

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