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.