Exchange traded funds are one of the most cost efficient investment tools available on the market. This factor alone is contributing to the overall growth and popularity of this segment of the market, with total assets at $1.53 trillion as of July 31, 2013.
“Like mutual funds, ETFs charge a total expense ratio or annual charges that come directly out of the funds’ returns. ETFs’ expense ratios are generally lower than those of comparable mutual funds,” Deborah Fuhr wrote for ETFGI. [ETF Competition Lowers Costs for Investors]
The low-cost feature of exchange traded funds continues to attract new investors to the industry. Investors have been satisfied with the cost effective feature of investing with ETFs, since the total expense ratio (TER) is eventually extracted from the investment principal. [More Mutual Fund Managers Using Low Cost ETFs]
On average, the TER of an asset class ETF in the U.S. is 0.27%, compared to 77 bps with the average mutual fund. Fixed income ETFs feature the lowest cost, at an average of 23 bps, with alternative ETFs presenting the most expensive expense at 98 bps. The average equity based ETF has a TER of 23 bps, which compares to the affordability of fixed income funds.
When investors compare expense ratios it is necessary to consider other factors such as investment objective, the benchmark, assets under management and the operations of the managing provider, reports Fuhr. [In the Trenches of the ETF Fee War]
Other factors to consider when contemplating TER include replication strategies, product structure, assets under management, performance, liquidity and the bid/ask spread.
A recent study by Chicago-based Spectrem Group revealed that low cost ETFs have attracted high net worth investors (UHNW) on this merit alone. The research firm concluded that 28% of investors own ETFs. Of the ultra high net worth investors, those that are worth $5 to $25 million, minus their primary residence, 47% of such investors use ETFs.
“Wealthier investors are more likely to purchase ETFs,’’ George Walper, President of Spectrem, stated. “They can afford to make initial investments in alternative products.”
Carol Schleif, a regional chief investment officer of asset management for Abbot Downing, a Wells Fargo business that serves UHNW clients, is quick to refute the idea that the prospect of higher upfront loads and 12b-1 fees leads advisors away from ETFs, reports Donald Jay Korn for On Wall Street. “Our clients want the best fee-adjusted and tax-adjusted returns,” she told On Wall Street. “If an ETF will deliver that, we’ll recommend the ETF.” [Fee War Could Hit Specialty, Niche ETFs Next]
Tisha Guerrero contributed to this article.