Keeping investment costs low is one of the few things investors can control, and over decades even seemingly small expense ratios can compound into meaningful differences in portfolio value. In general, you want to pay as little as possible for maximum diversification.
For years, Fidelity grabbed headlines with its lineup of zero-expense-ratio mutual funds. They’re certainly attractive products, but I still prefer ETFs whenever possible. Thanks to the in-kind creation and redemption mechanism unique to ETFs, they generally distribute far fewer capital gains than comparable mutual funds, making them more tax-efficient in taxable brokerage accounts.
The good news is investors no longer have to choose between ETFs and zero fees. Today, the most prominent zero-expense ETF lineup comes from BNY Mellon, making it possible to build a traditional 60/40 portfolio without paying a management fee.
60% in BKLC
The equity side of the portfolio comes from the BNY Mellon U.S. Large Cap Core Equity ETF (BKLC). BKLC tracks the Solactive GBS United States 500 Index Total Return rather than the S&P 500. While the two benchmarks appear similar at first glance, the difference is worth understanding.
The S&P 500 relies on an index committee that determines which companies qualify based on factors such as market capitalization, liquidity, profitability, and trading characteristics. BKLC’s benchmark takes a purely rules-based approach, simply selecting the 500 largest publicly traded U.S. companies at each reconstitution before weighting them by market capitalization.
The result is broad exposure to the U.S. large-cap market without relying on committee decisions or subjective judgment. Although it doesn’t receive nearly as much attention as larger index ETFs, BKLC has grown to nearly $5.5 billion in assets under management.
Its biggest selling point, of course, is cost. The ETF charges a 0.00% expense ratio, currently offers a 1.02% annualized dividend, and maintains solid trading liquidity with a 0.03% median 30-day bid-ask spread. Performance has also been encouraging. Over the past five years, BKLC generated a 13.52% annualized return.
40% in BKAG.
The remaining 40% of the portfolio is allocated to the BNY Mellon Core Bond ETF (BKAG). The ETF tracks the Bloomberg U.S. Aggregate Total Return Index, one of the most widely followed benchmarks for the U.S. investment-grade bond market. Its holdings include U.S. Treasuries, agency mortgage-backed securities, and investment-grade corporate bonds.
Because the fund invests across a wide range of maturities, it maintains an intermediate-duration profile of 5.87-years, making it moderately sensitive to changes in interest rates. This can help you when rates fall, but can hurt you when rates rise (like in 2022).
The ETF currently pays a 4.7% 30-day SEc yield with monthly distributions. Trading liquidity is also respectable, with a 0.02% median 30-day bid-ask spread, making the ETF fairly easy to rebalance in and out of. However, tax-efficiency isn’t the greatest due to the inclusion of corporate bonds that generate ordinary income.
A Zero-Fee 60/40 Portfolio
Together, BKLC and BKAG offer everything most investors need from a classic balanced portfolio: broad exposure to U.S. large-cap stocks, diversified investment-grade bonds, and perhaps most impressively, no expense ratios. However, it does lack international diversification.
Of course, eliminating expense ratios doesn’t mean investing is free. Investors still need to consider bid-ask spreads, taxes, and the underlying risks of stocks and bonds. But by removing one of the few guaranteed drags on long-term returns, these two ETFs show that building an extremely low-cost diversified portfolio has never been easier.
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