SoFi’s FREE ETF: Should You Load Up On It?

Loading up is life.
4 min read

SoFi is launching a free ETF

So apparently, in fresh-grad student world, ETFs are way too hot to ignore now, to the point where FREE ETF are popping up. See this article.

Change Chumps, I don’t wanna read because I’m lazy and I like Netflix.

OH FFS.

Too Long Didn’t Read: Refinancing-mammoth SoFi (Social Finance) is getting into investing and launching their own free ETF with no fees.

Change Chumps!! Should I start loading up on those ETFs instead of Vanguard’s!!? They’re FREE!!”

Hold my cup of coffee while I whoop your ass.
Free Coffee
Who WOULDN’T take free coffee, tho?

Let’s take a step back and gather our thoughts here for a second.

When a news outlet says “free ETF”, we’re assuming they mean a 0% MER (Management Expense Ratio, basically the operating costs), which would make this true -SoFi would be the first company to launch a completely MER-free ETF-.

As always though, always read the fine print. This ETF is only MER-free for the 1st year. After that, you will be hit with a 0.19% MER!

Ha! Some fine prints for you!

Investors often underestimate the importance of fees

We get it, we like free things too. And as long-term buy and HODLers (Hold On for Dear Life) on the quest to financial independence, the concept of lower fees is important, if not life-changing. The problem with 90% of investors is they underestimate the importance of fees.

The Chump Change Example

  • Chump A invests $100,000 with a 0.04% MER ETF (like VTI) at 7% returns for 30 years
  • Chump B does the same with a 0.19% MER (like the SoFi one being introduced)

But that’s just a 0.15% difference in MER! That’s nothing!

Hold up. Let’s look at it differently, the difference in MER is actually:

0.19 divided by 0.04 basis points = 475%.

Let me ask you: If the benefits were the same, would you be okay with moving your money to a bank account that charges 5 times your previous monthly fee?

Oh hell no Change Chumps!!

I thought so.

Well there you go. In addition, we haven’t even looked at how the MER difference would affect long-term gains. In the short-term, say over a year, the difference is very negligible. But we don’t play the 1-year or 2-year time-frames. We play the long-term compounding game.

Change Chumps!!! If I do my maths right that’s like……… A LOT OF MONEY.

Yes, yes. It is.

Let’s draw in some graphs for the above examples just because I like pictures.

See how the yearly fees compound up quickly?
Speaks for itself.

Over 30 years, you’d pay a total of $17,346 in fees for 0.19% MER but only $3,751 in fees for a 0.04% MER fund!! Almost 5 times as much!

OUCH!

And if you look at the total portfolio value, you get the following:

Gosh I love compounding.

That’s nearly a $33,000 difference! Could be 1 year’s worth of expenses in retirement! Not so sure about loading up on all that “FREE” stuff of a sudden…

A small percentage of small money is small money. A small percentage of a LOTTA MONEY is a LOTTA MONEY.

Our conclusion.

Just for your information, my current holdings carry the following MER:

Low MER ETF. That's what it's all about.
All hail low-MER Vanguard! Notice international stock index VEU’s MER is at 0.09 at time of writing. I’m OK with that.

Always look for low fee or commission-free offerings

On the other hand, commission-free ETF for buy/sell transactions have been around for a long time. Each investing entity, like Vanguard, Charles Schwab and Fidelity already offers commission-free transactions for their own ETFs. That goes without saying, you SHOULD already be taking advantage of that.

Yes Change Chumps, I do.

Good, good.

In the case of SoFi here, we aren’t sure that their offering will be commission-free. One can only assume.

Always ask “why”

Another thing to consider: SoFi seems to be launching this free ETF purely out of competitive pressure. That is, if it weren’t for Vanguard and others offering low-cost ETFs, they probably wouldn’t be doing this

What do you mean?!

By that I mean that they’re most probably likely going to use it as a loss-leader to attract and keep young investors (possibly while they’re being caught up paying off their loans? I know, I was one big student loan HODLer).

After all that work of investing in the funds and finding out after 1 year about the high fees, it would be A LOTTA WORK to sell all the funds and move them than to just pay out the 0.19% MER. It’s kind of one of those things where it’s easy to opt-in and harder to opt-out.

Yes Change Chumps, I’m lazy and I don’t want to do much.

Don’t worry, so are we.

Lastly, and this is probably a future topic for longer discussion, let’s not forget that Vanguard is also INVESTOR-OWNED, so the company’s interests and YOURS are ONE and the SAME. They don’t want high fees and neither do we!

Question for you: will you jump on SoFi’s free-ETF or maybe another one?! Did we miss something?! Are we too much Vanguard fanboys?!

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