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Is JP Morgan about to drop the first free ETF in the US?

JPM has filed for a US equity ETF, which analysts argue will need to charge below 0.04% to gain traction. Could it cost nothing at all?

Is JP Morgan about to drop the first free ETF in the US?

Could JP Morgan be poised to launch the first free ETF?

This seems to be the first question raised by analysts upon hearing that the asset manager is preparing to launch the JPMorgan BetaBuilders US Equity ETF. 

The firm submitted a filing for the fund to the Securities and Exchange Commission earlier this month. The document shows that JPM plans to launch the ETF in 2019 and that it will track the Morningstar US Target Market Exposure index.

It does not, however, list any proposed fees for the fund, which some analysts have suggested might be offered for free, given the low cost and highly competitive nature of the US equity index fund market. 

'My guess is this could be the one,' said Eric Balchunas, Bloomberg Intelligence, senior ETF analyst. 

Todd Rosenbluth, director of ETF and mutual fund research for CFRA, said the fund was likely to have a single-digit basis point expense ratio, but he wondered how low it would go.

‘They’re going to need to be competitive,’ Rosenbluth said. ‘I’m not saying they go to free—I have no idea—but JPM is just as likely as any other asset manager to launch a free ETF, and US large-cap is the likely route we’d see, given how competitive it already is.’

The $154 billion iShares Core S&P 500 ETF and $431 billion Vanguard S&P 500 ETF both charge four basis points (bps), so JPM would need to match or go even cheaper than these funds in order to give investors a compelling reason to switch, Rosenbluth said. 

Going low cost is a strategy JPM has adopted already with the launch this summer of three other regional equity ETFs: JPMorgan BetaBuilders Japan, JPMorgan BetaBuilders Canada, and JPMorgan BetaBuilders Europe. For example, the JPMorgan BetaBuilders Japan ETF has an expense ratio of 19bps, undercutting the iShares MSCI Japan ETF's 0.49bps

The JPMorgan BetaBuilders Japan ETF has seen a huge influx in money since launch, with assets under management at $2.3 billion at the end of October. Cost alone was not enough to drive these flows however, as it emerged the majority of this money had come from err... JPM, as first reported. 


Still, JPM could not have been justified in moving clients' money into in-house ETFs of this nature if they were more expensive than more established third-party products. 

As it was clients, got a fee cut, even if JPM was the real winner. 

‘JPMorgan, in addition to eating its own cooking and supporting its internal business, is able to actually save money as a result of it,’ said Rosenbluth.

So, if JPM wants to repeat the trick with its US equity ETF, the consensus seems to be that it must undercut the fees charged by the iShares and Vanguard ETF. 

But does this mean JPM will follow the path set by Fidelity with its zero-fee mutual funds and offer a free ETF? 

'For them to come out with a zero-fee ETF would be consistent with their aggressiveness lately,' Balchunas said. 'They have that warrior spirit.' 

However, he also pointed out that JPM would need to pay something to Morningstar, which was providing the fund's index.

Rosenbluth added that JPM had the business model to make a zero-fee ETF work.

‘With the deep pockets that the parent company has, and the same ability as Fidelity to be aggressive on pricing, because of other businesses, JPM certainly has strong businesses outside of asset management that could support such a move,’ he said.

A JPM spokeswoman confirmed the contents of the filing but declined to comment further. 

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