Price Comparison Shopping with ETFs
March 14th 2013 at 8:47am by Tom Lydon
Investors are aware of investing costs more than ever due to the recent exchange traded fund provider price wars. The lower the investment costs, the more capital that is preserved, which has brought expense ratios into focus.
The expense ratio is a yearly fee charged to a fund’s shareholders that is used to cover fund expenses, including administrative fees, management fees, operating costs and other fund costs. Because operating expenses are taken out of the fund’s assets, the return for investors is thereby reduced by the expense ratio percentage, Jean Folger wrote for Investopedia. [What's Next in the ETF Fee War]
An expense ratio may not seem like a whole lot of money, especially for those investors who are long term buy-and-hold advocates. Over time, however, the expense adds up and will have a negative impact on returns and possibly, cut into principal. Investors who want exposure to a certain commodity or asset class have options when it comes to ETF selection. Thanks to different fund managers, there are several options for investment when it comes to portfolio construction. [Low Cost Online Brokers For ETFs]
The S&P 500 is like the back bone for U.S. investors portfolios, so it is natural to begin with a broad-based ETF that tracks the largest and most profitable U.S. companies. The SPDR S&P 500 (NYSEArca: SPY) costs a reasonable 0.09% and touts $122 billion in assets, reports Zacks. A more cost-effective way to gain S&P 500 exposure with an ETF is with the Vanguard S&P 500 ETF (NYSEArca: VOO). VOO costs 0.05%, with $8 billion in management. The Schwab US Broad Market ETF (NYSEArca: SCHB) beats out both at 0.04%. Of course, there are other costs to trading ETFs beyond the expense ratio. Less-liquid ETFs can have wider bid/ask spreads.
For investors seeking exposure to gold and silver with a physically-backed ETF, there are a few expense ratios to compare. For example, the SPDR Gold Shares (NYSEArca: GLD) is the largest holder of gold bullion, and charges 0.40% for an investment. The iShares COMEX Gold Trust (NYSEArca: IAU) tracks the daily price movement of physical gold, too, and costs about 0.25%, with about $11 billion in AUM. The same pattern is evident with silver ETFs, with the iShares Silver Trust ETF (NYSEArca: SLV) costing 0.50% and the ETFS Physical Silver Shares (NYSEArca: SIVR) costing a low 0.30%. Both ETFs allow physical exposure to the metal, held by a custodian, and have reliable trading volumes. [Gold ETFs See Record Cutbacks in Bullion Holdings]
ETF alternative exist for most sectors and asset classes. It is worth the time it takes to research and figure out which fund will fit into ones portfolio, at the best possible price. Most of the alternative ETFs give exposure to the same product, with a few factors such as liquidity compromised, they just cost less.
Tisha Guerrero contributed to this article.
Full disclosure: Tom Lydon’s clients own SPY, GLD and SLV.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.