Exchange traded funds are trademarked as a lost-cost alternative to traditional mutual funds. Yet are beginning to disagree and are revealing data that closes the gap between the fees.
“You hear all the time from fund sponsors that ETFs are less expensive to own than mutual funds,” Joel Dickson of Vanguard said. “But that’s more myth than reality.”
Morningstar data stated that with the amount of fees an investor pays as a percentage of fund assets, a typical mutual fund costs almost twice as much on an annual basis than an ETF. This data includes actively managed funds that are run by a fund manager, reports Murray Coleman for The WSJ. Furthermore, Morningstar’s database shows ETF expense ratios run about 0.60% as compared with 0.77% for mutual funds bound to an index.[Index ETFs Chip Away at Active Fund Industry]
By lumping together all ETFs and all mutual funds and then comparing them, the comparison is too broad. There is such a vast difference in ETFs, from the broad-based, SPDR S&P 500 (NYSEArca: SPY) to the leveraged, or niche ETF that costs more than double. Plus, mutual funds offer different share classes enabling providers to target larger investors and offer ETF-like expenses. [iShares: Comparing Mutual Funds to ETFs]
“The cost difference between index mutual funds and ETFs has narrowed to the point of becoming less about management fees and more about transaction costs and trading volume,” Hugh Smith, CIO of Welch Group, said. [Vanguard ETF Fees: The War of Fog]
The hidden cost with ETF investing comes with the commission fees. Many times these are additional to the expense ratio. Since ETFs can trade as easy as a single stock, the transaction costs can add up. Many ETF providers are now offering free trades for in-house brokerage accounts, while some providers that offer both ETFs and mutual funds offer both funds on a commission-free basis.
Tisha Guerrero contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.