The exchange traded fund “fee” war has been in focus over the past year as sponsors have rallied for market share. While an expense ratio is a big consideration for investors, it should not be the deciding factor.
“In ranking equity and fixed income ETFs, S&P Capital IQ uses three cost factors to provide insight into how an ETF compares to its asset class. The gross expense ratio is supported by the aforementioned bid-ask spread and the 5-day average price-to-NAV. On the MarketScope Advisor platform, users can see these metrics as well as whether they contribute favorably or unfavorably to the overall ETF ranking,” S&P Capital wrote in a recent note.
S&P Capital hosted two panels at the recent Pershing INSITE 2013 conference in Florida titled “Promising New Strategies in the World of ETFs”. The focus of discussion was the metrics investors should use in order to sort through the 1,000 plus choices of ETFs on the market. Ryan Issakainen of First Trust and David Mazza of State Street Global Advisors were on hand to to give additional insight.
Many ETF providers have substantially lowered the cost of owning an ETF in an effort to keep up with current industry trends. Commission-free trading platforms have also been a popular offer for various brokerage houses. Experts warn that costs should never be the only deciding factor when selecting an ETF. Stock selection and weighting within a benchmark are more important since this influences performance. For instance, an ETF could cost more than a similar fund, but may outperform the other due to sector or stock choice. This ETF will give back more than what could have been saved with a lower expense ratio due to outperformance. In fact, some ETF sponsors may use a low expense ratio as a selling point in order to gather more assets under management. [Cost Matters with ETFs: Vanguard Report]