Many cost-conscious investors only look at ETF expense ratios when searching for the fund with the lowest fees. However, the total cost of investing in an ETF includes other factors such as trading spreads.
Also, some ETFs justify their above-average fees with superior performance, according to S&P Capital IQ.
“A high-cost ETF may still garner an ‘overweight’ or ‘marketweight’ recommendation from S&P Capital IQ if the performance or the risk analysis is strong,” S&P Capital IQ wrote in a recent note.
“Costs alone shouldn’t automatically be reason enough to avoid certain ETFs,” says Todd Rosenbluth, an S&P Capital IQ ETF analyst, even while acknowledging that investors “often look for the cheapest ETF around, regardless of quality.”
He recommends that rather than looking only at costs, investors should “look inside and see what these ETFs actually own. While the relative gross expense ratio is a component of the S&P Capital IQ ETF ranking within our cost-factors analysis, we think looking under the hood is more important.”
“Ask yourself if the ETF is more expensive because there is a quasi-active, rules-based approach behind it that fits in well with your valuation and risk analysis,” he said.
The ETF that is highlighted in a recent note is the First Trust Strategic Value Index ETF (NYSEArca: FDV) with a net expense ratio of 0.65%. Many of the comparable large-cap funds trading have expense ratios of 0.25%, but they lack the custom, rules-based approach that this ETF has. If an ETF re-balances often to keep over-concentration risk at bay, the fee may be higher. [ETF Chart of the Day: Mega Caps]
According to the S&P Capital IQ, the underlying holdings in this fund look healthy and from a technical standpoint, the trend looks bullish for FDV. [In the ETF Price War, Investors Win]
FDV has a heavy weight toward financials, energy and information technology. According to Rosenbluth, the need for investors to consider stock exposure, and overall stewardship of an ETF has been neglected in the headlines too much, and while cost is important, it should not be an end-all be-all for the decision-making process. After all, sometimes you get what you pay for. [ETFs: Still the Industry Bargain They Used to Be?]
First Trust Strategic Value Index ETF
Tisha Guerrero contributed to this article.