Mar 15, 2019

Negative-fee ETFs could "change the psychology of the marketplace"

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Investment firm Salt Financial plans to offer a fund that will temporarily pay investors to hold it, according to regulatory filings unearthed this week by Bloomberg, and analysts at Moody's Investor Service believe there's more of this to come.

Why it matters: While Stephen Tu, a Moody's vice president, wouldn't predict just how far the trend of negative-fee ETFs could go, he did say he thinks more asset managers will be offering to pay investors to hold their funds.

"It changes the psychology of the marketplace," Tu tells Axios.

Details: The negative-fee ETFs are the latest in the war by asset managers to attract money that is moving quickly out of active funds. In 2018, mutual funds saw the highest yearly outflows on record.

  • "The consumer trend toward passive investment products is akin to the adoption of an improved technology," Tu wrote in a recent Moody's white paper.

What's next? Moody's is anticipating so much more money will move into passive investing vehicles, in large part because of low fees, that by 2021 they expect passive funds to hold more assets than actively managed funds.

  • As of December 2017, researchers at the Fed found that passive funds accounted for 37% of combined U.S. mutual fund and ETF assets under management, up from 3% in 1995.
  • Investors are moving to passive strategies not just because they're cheap, but because management fees and commissions are a form of "leakage in earnings," Tu argues.

How a negative-fee ETF works: During the first year, ETF holders will earn 50 cents for every $1,000 invested in Salt's ETF, capped at $100 million, at which point it will be shared with all investors. A $2.90 management fee may be applied after April 2020.

Between the lines: Tu tells Axios that the fund's fee waiver of $34 on $10,000 of invested capital (offsetting $29 in fees to net $5 paid to the investor) likely can be offset by these companies through securities lending, i.e., loaning out stock to short sellers.

Go deeper: Invesco's chief executive says a third of the asset management industry could disappear over the next 5 years.

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Coronavirus dashboard

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  1. Global: Total confirmed cases as of 12:30 p.m. ET: 1,506,936 — Total deaths: 90,057 — Total recoveries: 340,112Map.
  2. U.S.: Total confirmed cases as of 12:30 p.m. ET: 432,596 — Total deaths: 14,831 — Total recoveries: 24,235Map.
  3. Business: The Fed will lend up to $2.3 trillion — Another 6.6 million jobless claims were filed last week.
  4. Public health latest: Dr. Anthony Fauci said social distancing could reduce the U.S. death toll to 60,000.
  5. Travel update: TSA screened fewer than 100,000 people at airports in the U.S. on both Tuesday and Wednesday, compared to 2.2 million passengers on an average weekday a year ago.
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  7. What should I do? Pets, moving and personal healthAnswers about the virus from Axios expertsWhat to know about social distancingQ&A: Minimizing your coronavirus risk.
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Trump plans second coronavirus task force focused on the economy

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President Trump is preparing to launch a second coronavirus task force focused on reviving the U.S. economy, which has been battered by the coronavirus, two administration officials tell Axios.

Why it matters: There is growing energy within the West Wing to start easing people back to work by May 1. But some public health officials, including those on the coronavirus task force, have warned against doing so, raising concerns about reopening America too soon.

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Why it matters: Gov. Andrew Cuomo said at a press conference that social distancing is helping to "flatten the curve" of coronavirus hospitalizations, and that deaths are a lagging indicator. Still, he called the death figures "shocking and painful," noting that the virus has killed more than double the number of people who died in New York on 9/11.

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