BKLC - BNY Mellon U.S. Large Cap Core Equity ETF: Own The S&P 500 At No Costs To You

2023-09-22 12:50:55 ET

Summary

• The BNY Mellon US Large Cap Core Equity ETF offers investors a way to essentially own the S&P 500 in a very cost-effective format.
• The fund has no expenses or ongoing fees, making it an attractive option for cost-conscious investors, and the benchmark Morningstar US Large Cap Index largely replicates the S&P 500 index.
• The S&P 500 is a well-established investment benchmark.
• Time will tell if no-cost funds are truly viable for fund managers.

If competition is supposed to drive down costs, the zero-cost ETFs may be the apotheosis of that idea. While some earlier zero-cost ETFs came with certain strings attached (the funds would make money by lending out securities or were only available directly from the sponsor/manager), Bank of New York Mellon ((BNY)) has taken a different approach with its funds – creating true loss-leaders in the hope, I would imagine, that investors will come back for other BNY Mellon funds that generate some profits for the company.

This brings me to the BNY Mellon US Large Cap Core Equity ETF ( BKLC ) – a no-cost (zero expenses or fees) ETF that largely mimics the S&P 500. Apart from some theoretical concerns about whether this fund's management approach is sustainable over the long term and more boilerplate concerns about whether large cap index investing is right for a particular investor, this is definitely a name worth a closer look for investors who want some passive large-cap exposure.

What It Is

The BNY Mellon US Large Cap Core Equity ETF (or just “BKLC” from here on) is a passively-managed fund that seeks to replicate the performance of the Morningstar US Large Cap Index. This, in turn, is basically just the S&P 500 with some filters applied (in this case, the Morningstar fund takes the top 70% of the S&P 500 by capitalization). With that, the fund owns around 200 stocks (197 at the most recent update), but comes quite close to matching the performance of the S&P 500.

The biggest attraction here is the no-fee structure. There are zero expenses or ongoing fees for owning this fund – it’s a zero-cost fund where the BNY Mellon absorbs the costs. While there are other ultra low-cost funds out there that provide exposure to the S&P 500, this is about as low as an investor will find.

As of the most recent report, the fund holds 197 securities, and these are among the largest companies in the world. The top 10 holdings make up about 36% of total assets and the top four alone ( Apple ( AAPL ), Microsoft ( MSFT ), Amazon ( AMZN ), and Nvidia ( NVDA ) make up close to one-quarter of the fund’s holdings. That does introduce concentration risk, but that’s true of other indices like the S&P 500 or Dow Jones Industrial Average (those four aforementioned stocks make up 20% of the S&P 500 by weighting).

source: BNY Mellon Investment Management

As an index fund, I would argue the tenure and stability of the management team is moot – index funds basically run on autopilot and managers don’t have discretion. Given what the fund and index seek to replicate, the holdings of the fund include the largest publicly-traded companies in the U.S. and about 70% of the fund holdings are classified as “wide-moat” by Morningstar. Turnover is a bit higher than you might expect (at around 19%), but that’s a byproduct of how the index is constructed and managed.

The Positives Of This Fund

It is beyond the scope of this article to get into whether passive investing is superior to active investing, but the fact does stand that passive index investing is a valuable option for many investors. The key to success with passive investing is cost management, and with a zero-cost structure, an investor really can’t do better than this. Likewise, whether an S&P 500-like holding is appropriate for a particular investor is up for them to determine, but there are valid reasons with the S&P 500 is so often used as a benchmark – if an investor wants to “own the market” (at least in the U.S.) and not try to pick winners, this is a good way to achieve that.

I’m impressed by what appears to be a true no-cost structure. Some zero-fee ETFs have “catches” to them – the fund is only available directly from the sponsor/manager, the fund may engage in securities lending (to generate profits for the manager), and so on. In this case I don’t see any such catches – if the fund lends securities, the proceeds go to the fundholders and the shares can be bought through any broker (which may, or may not, charge a commission, as zero-commission trading does exist now as well).

It seems as though BNY Mellon is willing to use this as a loss-leader type of product. Accumulating assets under management just for the sake of reporting larger AUMs is arguably of little value (though investors do pay a lot of attention to monthly and quarterly AUM growth numbers from publicly-traded managers), but I assume BNY Mellon is banking on the idea that satisfied investors may come back and look into other BNY Mellon properties – some of which will carry fees that earn the company some profits.

As far as performance goes, the fund has done a good job of tracking the benchmark index. Over the last three years (the fund launched in April of 2020) the fund has generated a return of 9.45% versus 9.56% for the index. Likewise, comparing the fund to the S&P 500 since inception shows minimal separation in performance over that time – for all intents and purposes, investors are getting a no-cost S&P 500 with this fund.

The Negatives Of The Fund

I can’t find many negatives with this fund. The shares are plenty liquid (average daily volume of 366,000) and the AUM is meaningful at $1.7B. Between those two metrics, I see little risk of an investor not being able to easily establish or liquidate a position, and I see little risk of the fund shutting down due to insufficient interest. Honestly, the negatives here are all largely tied to whether index investing suits an individual investor and whether investors feel the Morningstar US Large Cap Index is a good enough proxy for their passive investment needs.

This may be reaching at straws, but I suppose a potential negative of the fund is the zero-cost structure. If a company isn’t making money off of a product, it stands to reason to think that maybe that product won’t always be a part of the company’s future plans. In other words, maybe managers like BNY Mellon decide at some point in the future that zero-cost ETFs just don’t ultimately make sense for them, and they close them or restructure them to include costs. There would be plenty of advanced notice should such a thing occur, and again I mention this is only a theoretical risk.

The Bottom Line

By and large, I have not used ETFs all that much in my personal investing career – they absolutely can and do serve a purpose, but I have generally preferred to own individual stocks. That said, it’s hard to argue against the idea of owning BKLC as a “cornerstone” type of holding, particularly for investors who like barbell-type strategies (an investment strategy that combines lower-risk investing with higher-risk investing in an attempt to achieve higher returns with lower overall risk). With no costs, minimal “slippage” versus the benchmark, and S&P 500-like performance in a more cost-efficient package, this is definitely a name to consider for investors who want that sort of exposure in their portfolio.

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