A Vanguard executive reportedly says the asset manager could theoretically offer ETFs to investors in Europe with zero fees. However, investors shouldn’t hold their breath for no-cost ETFs.

Nick Blake, head of retail at Vanguard Investments, in an Ignites Europe report said revenues from securities lending alone are sufficient to make ETFs profitable.

The idea of free ETFs does sound farfetched.

In fact, Brendan Conway at Barron’s reports that a Vanguard spokesman has poured cold water on the idea. “Vanguard has no plans to offer a zero expense ETF,” the Vanguard spokesman told Barron’s. “All investment products have fixed management and operational expenses, and while some providers may choose to absorb or waive some costs in order to offer competitive expense ratios, Vanguard does not engage in this practice.”

Still, the Ignites Europe report published on the Financial Times website did have the ETF industry buzzing on Tuesday.

“I would like to think the cost of investing [in ETFs] could come down to zero,” Blake said in the report. “There will always be a fixed cost in there, but if [a firm’s asset] volume is big [enough], the total expense ratio can come right down.”

Speaking at a conference in London, the Vanguard executive said the company’s ETF fees can decline more due to the revenues physical ETFs can generate from securities lending.

In theory, Vanguard could even pay investors to invest in the firm, creating negative expense ratios, Blake said.

Nizam Hamid, an independent ETF consultant, in the Ignites Europe report said that revenue from securities lending can indeed help offset fees.

Yet he added there are “very few funds where you will get enough securities lending revenues” to completely offset the ETF fees. “It can happen in odd and exceptional cases, but it is quite hard to suggest it could be a strong ongoing theme,” Hamid said in the article.

Regulators have been taking a closer look at ETF securities lending practices in Europe. The European Securities and Market Authority has proposed more rigorous guidelines on collateral. [European Regulators Focus on Securities Lending in ETFs]

“It’s a pipe dream,” said Ben Seager-Scott, senior research analyst at BestInvest, referring to the idea of no-fee ETFs.

“Encouraging firms to do more [securities lending] is not very wise [as] lending out more of an ETF effectively turns physically replicated ETFs into synthetic ETFs,” he said in the Ignites Europe story. “It’s a nice idea, but the reality is that people want to invest in very liquid [products], and there is not enough demand for securities lending that it would be feasible” to bring expense ratios down to zero.

The original version of this story has been updated.

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