Another important factor that investors should consider over fee reduction is the asset allocation within the underlying index. This is where is can get tricky because investors must do their homework and research the funds to figure out exactly what stocks the ETF holds, how much of it, and how representative the index actually is compared to the title of the fund. A failure to perform correctly can offset any reduction in fees and voids the notion that lower fees are most important. [Read More: Vanguard Shift Puts Focus on ETF Benchmarks]
“Index construction is a key element when looking at an ETF. What are the underlying securities, how do they fit into my client’s asset allocation model and what are the trading costs and liquidity associated with the securities. There is a huge difference between creating a benchmark index and a tradable, investable index,” Keary wrote. [Read More: ETFs Target Indices to Lower Fees Even More]
So, quality of the ETF overrides low cost if the ETF is going to suffer underperformance due to lower prices. The performance of the index and the quality of the companies it holds can make a bigger impact upon a portfolio than lower fees. [Read More: iShares S&P 500 ETF Attracts Cash After Fee Cut]
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