There are big discrepancies between assets and revenues, as analysts point out, but do expense ratios really matter to investors when it comest to investing with exchange traded funds (ETFs)?
Matthew Hougan for Index Universe shows evidence that investors seem to overlook expenses:
- iShares MSCI Emerging Markets (EEM) has an expense ratio of 0.74%. It currently has $24 billion in assets. Vanguard Emerging Markets (VWO), which is a competing fund, has a 0.30% expense ratio with a strong performance record, but has a smaller $6 billion in assets.
- Another case in point: Mid Cap SPDR (MDY) tracks the S&P 400 and charges 0.25% in expenses, with $8.2 billion in assets. iShares S&P 400 MidCap (IJH) charges 0.20%, tracks the same index and has $4.4 billion in assets.
This may be a case where the ETFs with the greatest assets in each category are also the first ETFs to hit the market, since this is the case in these examples.
Another clue Hougan cites as evidence that investors might not care much about expense ratios is that, with some exceptions, fund companies generally don’t market toward it. Some ETFs are launching today with fees of 0.70% or more.
Do investors know, but just not care? Perhaps. Expense ratios are just one factor in the equation. Spreads, in some cases, can outweigh any advantage a low expense ratio might offer.
It doesn’t seem a lack of understanding as far as ETFs go is the problem. A survey we summarized yesterday reported that of the investors who participated, 16% use ETFs. A large portion of these ETF users, 87%, said they understood how fees impacted their returns. This was quite different compared to all the survey respondents; 88% felt fees for the fund industry overall were unclear.
Which single ETF feature is most important to you among the following? Expense ratio, brand name, past performance or assets under management? Feel free to answer in the comments!