Many cost-conscious investors only look at ETF expense ratios when searching for the fund with the lowest fees. However, the total cost of investing in an ETF includes other factors such as trading spreads.
Also, some ETFs justify their above-average fees with superior performance, according to S&P Capital IQ.
“A high-cost ETF may still garner an ‘overweight’ or ‘marketweight’ recommendation from S&P Capital IQ if the performance or the risk analysis is strong,” S&P Capital IQ wrote in a recent note.
“Costs alone shouldn’t automatically be reason enough to avoid certain ETFs,” says Todd Rosenbluth, an S&P Capital IQ ETF analyst, even while acknowledging that investors “often look for the cheapest ETF around, regardless of quality.”
He recommends that rather than looking only at costs, investors should “look inside and see what these ETFs actually own. While the relative gross expense ratio is a component of the S&P Capital IQ ETF ranking within our cost-factors analysis, we think looking under the hood is more important.”
“Ask yourself if the ETF is more expensive because there is a quasi-active, rules-based approach behind it that fits in well with your valuation and risk analysis,” he said.