A new fund will pay investors to buy it. What’s the catch?

Think carefully.
Think carefully.
Image: Reuters/Brendan McDermid
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When someone offers you something for free, it’s a good idea to ask a few follow-up questions. When someone offers to pay you to use their service, it’s wise to ask even more, tougher questions.

An example of the latter is a new exchange-traded fund (ETF), which will pay investors who use it instead of charging them a fee: Salt Financial launched an ETF that will waive its fee (normally 0.29% of the customer’s assets) and will instead offer a type of rebate (0.05% of the customer’s assets). The payment is offered for the first $100 million in assets that flow into the fund over the next year, and will apply to its Salt Low truBeta US Market ETF. The Securities and Exchange Commission gave the fund the green light this week.

Not everything that’s free is straightforward, but Salt’s strategy appears clear: The idea is to entice customers to try the fund, boosting its assets under management to a size that makes advisors and brokerage platforms more likely to offer it. (Some advisors prefer to use funds that have at least $100 million in assets under management, for example.) Salt plans to charge a fee after the promotion period ends.

“There are a lot of obstacles that newer issuers face every day, and this is a way to really try to break through by doing something bold,” said Tony Barchetto, Salt’s founder and chief investment officer. The company was started in 2017. “Compared to the cost of going and marketing it, which we do as well with traditional marketing, it made sense to us to try to stick out with this.”

Salt’s payments to customers are the latest salvo in the asset management industry’s relentless fee war, as competition between industry giants like BlackRock, Vanguard, and State Street grind client-charges ever lower. Fidelity Investments won the race to zero last year when it offered stock-index funds sans fees. Once customers are in the door, Boston-based Fidelity may be able to make money by cross-selling other services to them.

Salt’s payments to ETF customers look more like a typical promotion that expires after a set period of time. Other financial companies have taken a similar approach: Some bank accounts offer customers money for setting up an account and switching direct deposits. Eric Balchunas, an analyst at Bloomberg Intelligence, said he empathized with smaller ETF issuers.

“It’s brutal out there,” Balchunas said. “Many magazines give you a free month or year subscription and even a free gift when signing up. It’s a normal practice in business if you think about it.”

Other seemingly free financial products are less straight forward. Companies like Social Finance and Robinhood tout commission-free stock brokerage, but they make money in other ways, such as by selling customers’ stock orders to trading firms. It might be a great deal for their customers—or it might not be. The trouble is, it becomes harder for customers to figure out what they’re actually paying for (or money they might be forgoing).

That doesn’t look like the case with Salt’s ETF: ”There’s no making it up elsewhere with some crazy business model,” Barchetto said.

However, a side-effect of falling fees is that there seems to be more discussion about expense ratios than what funds are actually investing in. Salt’s new ETF is similar to the quantitatively driven, smart-beta funds that rely on a rules-based system for picking stocks. Its high-beta ETF is more sensitive to the overall market, and its low-beta fund (which pays customers to buy it) is less sensitive to it. “One is risk-on, and the other one is risk-off,” Barchetto said.

As for the fee promotion, “the knock on it is that it’s gimmicky,” he said. “Well, what isn’t? This is an incentive.”