Anthony Noto, CEO of SoFi Adam Jeffery | CNBC

The race to zero-fee exchange-traded funds has found an unlikely competitor: Online lending and personal finance platform SoFi, which has filed for two index ETFs that will waive management fees for the first year. In making the move to zero-fee ETFs, the online lender is crashing an ETF party dominated by Vanguard and BlackRock's iShares. Many ETF experts predicted a zero-fee ETF was coming but thought it would be from an established fund company or brokerage company, such as Charles Schwab, J.P. Morgan or State Street, which manages the SPDR ETF family. But it does make sense that a new entrant would seek to gain attention by surprising the major players. "The ETF landscape is highly competitive as cheaper alternatives keep rolling out and established products receive much needed price haircuts. SoFi is definitely late to arrive to the ETF market (now 26 years old) and needs to make a splash to garner interest," wrote CFRA Research director of mutual fund and ETF research Todd Rosenbluth in a note published for CFRA clients on Monday. SoFi has made a name for itself building off a business that initially targeted the student-loan market for refinancing and has appealed to a younger demographic. It expanded its offerings to this demographic by providing personal and mortgage loans, mortgage refinances and wealth management services. It acquired banking start-up Zenbanx in 2017, enabling it to offer debit, payments and money transfers. "We all knew that we will see a zero-fee ETF soon. It was a question of when and not if. What surprised me that it was not one of the big players in the asset management industry," said Neena Mishra, director of ETF research at Zacks Investment Research. "It's a great PR move for SoFi and these funds would probably be loss leaders for the company. It would probably be able to sell other higher-fee products to customers who join its platform." SoFi disclosed in a filing that the planned ETFs are SoFi 500 ETF (SFY), the SoFi Next 500 ETF (SFYX), the SoFi 50 ETF (SFYF) and SoFi Gig Economy ETF (GIGE). It is only the 500 and Next 500 ETFs that will have fees waived (the fees for these ETFs are listed at 19 basis points otherwise). No fee level for the other two ETFs has been disclosed. ETF.com noted in a report on the filing that this is not the first time fees have been waived on an ETF, but the full-year fee waiver on a new launch suggests that SoFi's intentions might be to make it permanent. In 2016, State Street Global Advisors waived expenses for a few months on its new Real Estate Select Sector SPDR Fund (XLRE), but the situation was unique: it occurred at a time when the financial services and real estate sectors were being separated as indexes under GICS classification. Guggenheim did the same for its S&P 500 Equal Weight Real Estate ETF (EWRE), ETF.com noted. Rosenbluth told CNBC that many ETFs that put in place fee waivers at the time of launch continue to waive fees for years after. Those fee waivers have not been to zero, but have been significant and have remained in place. "There's a strong likelihood they stay at zero, but investors would need to do homework (as they do with all ETFs that have a fee waiver). To make sure the fee does not jump up. But we and others would be watching this closely," Rosenbluth said. SoFi was not immediately available for comment on the ETF filings.

The race to zero

Fidelity launched the first zero-fee index mutual funds in August, and its Fidelity ZERO Total Market Index Fund (FZROX) already pulled in $2.1 billion in assets, with the other three zero-fee products nabbing more than $1.2 billion, according to CFRA. Fidelity last week said it notched record income in 2018. Unlike the Fidelity zero-fee ETFs which are only available through Fidelity, SoFi ETFs are expected to be available for purchase by not only SoFi customers, but others using the Fidelity, Schwab or other third-party brokerage platforms. This would not provide SoFi the opportunity to as easily offer additional borrowing or investing services to its ETF shareholders. But earlier in February, SoFi announced its intentions to allow investors to trade stocks and ETFs on its platform. As it builds out its online brokerage and robo-advisor services, branded ETFs will fit the investment model. ETFs will give SoFi the opportunity to serve its target demographic — many members of which are under-invested — from a long-term investment perspective and complement its existing personal finance brands. ETFs have become referred to as "loss leaders," with many core ETFs from the major players now being offered at expense ratios as low as three or four basis points (0.03 percent to 0.04 percent) annually. Many experts caution that firms are making up that money in other ways, whether it be by lending out securities to other market participants and generating securities lending revenue, or by using the core low-fee funds as a way to entice investors into other higher fee products. "They are an online banking firm that will benefit by investing in these products and saving fees to invest rather than having members pay iShares. But yes they also crash the ETF party and can bring cost-conscious investors into their orbit to offer additional services," Rosenbluth wrote. "It's harder to do then with a mutual fund on your own platform like with Fidelity but if you want to break into the ETF market and focus on low costs then go to zero instead of matching peers at 3 basis points." When Fidelity launched its zero-fee index mutual funds, publicly traded asset management company stocks dove as the race to zero implied how hard it would be to run a profitable publicly traded asset manager. Shares were largely unmoved by the SoFi news on Monday. BlackRock founder and CEO Larry Fink has said in the past that he has no plans to offer a zero-fee ETF.

Pricing pressure