Exchange traded fund (ETF) costs may be low, but they add up. ETF investors should always be aware of the amount of money they are doling out in management fees and understand what the long-term impact of high fees will be.
The iShares MSCI Emerging Markets Index (NYSEArca: EEM), with $39 billion in assets at year-end invested and covering 430 stocks from the emerging markets, gained around 72% in 2009, writes William Baldwin for Forbes. [Things That Determine an ETF’s Performance.]
The cheaper alternative to EEM is the Vanguard Emerging Markets Stock ETF (NYSEArca: VWO). VWO’s year-end assets were $19 billion and it returned 75% on a slightly different basket of stocks.
VWO runs at an expense ratio of 0.27% – if you invested $100,000, you would pay $270 per year. On the other hand, EEM has an expense ratio of 0.72%, meaning you’d pay $720 a year on a $100,000 investment.
The point is: costs add up. Big time. Baldwin cautions investors to keep an eye on cost ratios no matter when you want to enter a market. If you spend half a percentage point a year too much on managing your money, you may drain away 14% in 30 years because of compounding.
Meanwhile, there’s a bit of a dispute over what the actual average mutual fund expense ration might be. The Investment Company Institute (ICI) pegs it at 1.17% per year for stock funds, but investing site kaChing says it’s a much higher 3.37%. Both sites have a vested interest in the answer to the question, says Ian Salisbury for The Wall Street Journal. The ICI has a mission to defend mutual funds from criticism, while kaChing’s service competes with mutual funds.
For more information on ETFs, visit our ETF 101 category.
Max Chen contributed to this article.