A major US index ETF provider is likely to launch a zero fee fund sooner or later according to Jeff McCarthy, chief executive of exchange traded funds at BNY Mellon, but they will likely be used as a loss leader for more expensive products.

The so-called race to zero has been the subject of much discus in the sector in recent years as price compression has seen the cost of some of the larger index tracking funds on the S&P 500 fall as low as single digit basis points.

S&P 500-based funds from BlackRock iShares, Vanguard and State Street's SPDR range are all already available at expense ratios of three basis points.

Speaking at the Inside ETFs 2018 conference taking place in Hollywood, Florida this week, McCarthy said that though at or close-to-zero funds were likely in the near future, they would not be the "norm."

"It's not the norm today, despite what you read about," he told the audience. "The average expense ratio for an equities ETF is 26 basis point. You're not going to have ETFs in abundance offering funds at 1, 2, 3 or even zero basis points."

However, he added that the attraction of using a zero or close-to-zero fund as a loss leader for some of the main providers would be tempting.

"Will you see an ETF at zero? Yes, but what does that mean?" he asked. "It will be a core, pure beta offering from a large asset manager who has a large footprint today."

The zero product would like, be an S&P 50o fund but the provider in question is likely to have a wider product set that they will also be offering to customers but at a higher expense ratio.

"They are going to have and offer a platform of products and some of those platform products may offer access to more esoteric asset classes, whether it is international fixed income or commodities and they will have higher expense ratios and will be delivered at a higher cost. So, they will subsidise offering a product at zero."

Still, McCarthy did warn about the effects that a close-to-zero fund would have on the sector ecosystem of suppliers and ancillary services.

"I don't think the industry will be best served by offering products at zero," he said. "There has to be an ecosystem to support these products. And it's not just the asset manager. There's legal, there are service providers. The index provider. You have to figure out where these entities can also make revenues which means they can invest in making the product better."

However, McCarthy did insist that the race to zero will also drive innovation in the rest of the product set.

"The same asset managers that want to offer these products at zero need to keep on thinking about products that generate more alpha and performance," he said. "Either active, or quasi-active or smart beta, to subsidise the zero product."

While many are focusing on the prospects for blockchain (which McCarthy feels is currently underserved) and bitcoin (where the SEC intervened last week), McCarthy suggested that active funds and fixed income were areas where he thought that innovation was likely to be seen in the years ahead.

"Active management will evolve," he said. "It really goes back to the concept of the wrapper. The SEC allowing more flexibility in how you deliver an active strategy with less transparency than they require today in these products; that will spur innovation and growth in the active and fixed income markets."

In particular, he noted that there was likely to be the same logic of smart beta applied in fixed income as was already the case in equities. "You will see the evolution of products in that area," he predicted.