ETF Fee Structures and Investor Trust: The Ethical Tightrope of Embedded Fees in Fund-of-Fund Models

The rise of exchange-traded funds (ETFs) has revolutionized investing, offering unprecedented access to diverse markets. Yet, as innovation accelerates, so too does the scrutiny of fee structures—particularly in fund-of-fund (FoF) models, where embedded costs and operational complexity can erode investor trust. Simplify's SBIL ETF, launched in July 2025, provides a compelling case study to evaluate whether such strategies represent genuine innovation or a veiled form of investor exploitation.

The Embedded Fee Conundrum

Fund-of-fund ETFs, which hold shares in other ETFs or mutual funds, often introduce layers of fees that compound costs for investors. These embedded fees can obscure true expenses, creating a "black box" effect where investors struggle to discern the actual cost of their holdings. Critics argue that such structures prioritize intermediary profits over transparency, while proponents claim they enable diversified, low-cost access to niche markets.

Simplify's SBIL ETF, however, diverges from this model. Structured as a government money market fund under Rule 2a-7, SBIL operates as a standalone entity, investing directly in U.S. Treasury securities and repurchase agreements. This "true ETF" approach avoids the fund-of-fund structure, yet it employs a novel fee strategy: Simplify Asset Management subsidizes operating expenses, including the management fee, to maintain an expense ratio of 0.15%. This contractual fee waiver, set to expire in October 2025, raises critical questions about sustainability and ethical intent.

SBIL: Innovation or Exploitation?

Simplify's strategy for SBIL is both pragmatic and ambitious. By covering operating expenses, the adviser effectively reduces the drag on the fund's net asset value (NAV), enhancing returns in a low-yield environment. This approach aligns with the broader industry trend of fee compression, where providers compete to offer cost-efficient alternatives to traditional money market funds.

Yet, the ethical implications are nuanced. While fee waivers can temporarily boost investor returns, they may also create unrealistic expectations about long-term performance. If the adviser withdraws its subsidy post-2025, the expense ratio could rise, eroding the fund's competitive edge. This raises concerns about whether SBIL's pricing reflects genuine operational efficiency or a temporary promotional tactic.

Moreover, the fund's active management introduces another layer of scrutiny. Unlike passive ETFs, which are inherently low-cost, active strategies require higher fees to justify their value. SBIL's 0.15% expense ratio is unusually low for an actively managed fund, suggesting that the adviser's subsidy is critical to maintaining this structure. While this benefits investors in the short term, it could create a dependency that risks misalignment with long-term investor interests.

Operational Implications and Investor Trust

The operational structure of SBIL underscores the tension between innovation and exploitation. By operating as a government money market fund in an ETF wrapper, Simplify combines the liquidity and transparency of ETFs with the stability of traditional money market funds. This hybrid model appeals to institutional investors seeking a cash-equivalent solution with daily trading capabilities.

However, the fund's reliance on fee waivers introduces operational risks. For example, the 30-Day SEC Yield (Subsidized) is higher than the unsubsidized version, creating a potential misperception of performance. If the fee waiver lapses, the unsubsidized yield could plummet, damaging investor trust. This highlights a broader industry challenge: how to balance short-term cost reductions with long-term transparency.

A Framework for Ethical ETF Design

To navigate these challenges, investors and regulators must adopt a framework that prioritizes:
1. Transparency: Clear disclosure of fee waivers and their expiration dates.
2. Sustainability: Ensuring that cost advantages are not contingent on temporary subsidies.
3. Alignment of Interests: Structuring fees to incentivize long-term performance rather than short-term gains.

SBIL's model partially meets these criteria. The fee waiver is disclosed in the prospectus, and the fund's focus on short-term, high-quality instruments aligns with its stated objectives. However, the lack of a clear post-2025 cost structure remains a concern.

Investment Advice

For investors, SBIL represents an attractive option in a low-rate environment. Its combination of liquidity, low fees, and U.S. government backing makes it ideal for cash management or as a buffer in volatile markets. However, investors should:
- Monitor the fund's expense ratio post-2025.
- Compare its performance against the unsubsidized 30-Day SEC Yield.
- Consider alternatives if the fee structure becomes less competitive.

Institutional investors, in particular, may benefit from SBIL's ETF format, which offers flexibility not available in traditional money market funds. Retail investors, meanwhile, should weigh the fund's active management against the potential for rising costs in the future.

Conclusion

Simplify's SBIL ETF exemplifies the dual-edged nature of ETF innovation. While its fee structure and operational design reflect a genuine effort to enhance investor value, the reliance on temporary subsidies introduces ethical and operational risks. The key question is whether such strategies can be sustained without compromising investor trust. As the ETF industry evolves, the balance between innovation and transparency will remain a defining challenge—one that SBIL's case study helps illuminate.