ETFs compete on fees. What else to consider
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As investors using exchange-traded funds know, the cost can be a fraction of the assets you invest in.
Sometimes ETFs from different providers (e.g. Vanguard) State Street, Charles Schwabetc. – track the same index (e.g. S&P 500), which can make it tempting to go for whichever is cheapest. But experts say when you choose a fund to invest in, it’s important to consider more than its expense.
“ETFs that compete on price are generally index trackers that charge the cheapest fees in their categories,” said Dan Sotiroff, a senior analyst at Morningstar. “Thus, other considerations will ultimately drive the investment decision.”
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ETFs have gained traction as an alternative to traditional mutual funds as a way to put money into a basket. investments. Advantages of ETFs include generally lower costs, greater tax efficiency, and intraday tradability. These funds now hold approximately $13.2 trillion in assets, up from $1 trillion at the end of 2010, according to Morningstar Direct.
The cost of investing in a fund is called the expense ratio and is expressed as a percentage of assets. The average expense ratio for passively managed ETFs (those that track an index and whose performance generally reflects the index’s gains or losses) is 0.14%, according to Morningstar. For ETFs that are actively managed and have a manager who makes strategic changes to the fund’s investments, the figure is 0.44%.
These numbers are important to investors because costs affect earnings, which can have a long-term impact on how much your assets grow.
For example, a $100,000 investment with 4% growth over 20 years and a 1% fee would grow to roughly $180,000 compared to approximately $220,000 with no fees. An analysis by the Securities and Exchange Commission. Therefore, the lower the expense ratio, the less impact it will have on your investment earnings.
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Sometimes it’s better to stick with a single ETF provider
While fees are important, there are other considerations when it comes to ETFs, Sotiroff said. This includes the effect of mixing and matching between different ETF providers.
That’s because there are subtle differences in how companies structure their indexes, he said. For example, if you have a Vanguard ETF focused on large-cap stocks and want to pair it with a small-cap ETF, you’d be better off using Vanguard’s offering, Sotiroff said.
“The size caps separating the large- and small-cap segments in these ETFs will not always align with the caps in similar ETFs, even if they target approximately the same market segment,” Sotiroff said.
For example, mixing one fund company’s ETF with another‘s He said this means you may over- or underweight some stocks and sectors and not get the risk/return risk you thought you did.
In these cases, “as a general rule, investors should stick to a single provider,” Sotiroff said.
Liquidity can also make a difference
Liquidity can also be important. If an ETF is trading thinly, you may have a hard time unloading it quickly, and the difference between the bid price (the price the buyer is willing to pay) and the ask price (the price the seller is willing to buy) may be larger.
Consider the bid-ask spread and average daily trading volume, says Kyle Playford, a certified financial planner with Freedom Financial Partners in Oakdale, Minnesota.
“Look at differences of just a few cents,” Playford said. “Wider spreads may mean less liquidity.”
And “the higher [trading] “The higher the volume, the more liquid an ETF generally is,” he said.
Meanwhile, there may be an ETF that outperforms the one with the lowest expense ratio. For example, you might be able to find an actively managed ETF that outperforms a passively managed index ETF enough to justify the higher cost if the difference isn’t huge, Playford said.
“We have seen opportunities in equity, emerging markets, international, sometimes small and mid-cap ETFs, where actively managed ETFs have outperformed passively managed versions,” Playford said.
“It’s more expensive, but in the long run you can get better performance with active stock picking, especially when markets are more volatile,” he said. Managers “have some ability to move in and out of holdings rather than just following the index.”
For example, the Avantis emerging markets equity ETF (ticker: AVEM) is actively managed and comes with a 0.33% expense ratio. It increased by more than 33 percent last year. This compares with Vanguard’s passively managed emerging markets stock ETF (ticker: VWO), its expense ratio is just 0.07%, but its one-year return is less than 25%.
