Exchange traded fund fees are going lower as providers slash prices to gain market share. Low fees can help a fund outperform, but there are other factors to consider.
“We’ve come to the point where the ETF industry’s fee war is becoming inconsequential for investors. In the end, paying five basis points for the Vanguard S&P 500 ETF (NYSEArca: VOO) than seven for the iShares Core S&P 500 ETF (NYSEArca: IVV) might get you a savings equivalent to, let’s say, the change currently under your couch cushions. It’s just not worth getting worked up about,” Steve Garmhausen wrote for Barron’s. [S&P 500 ETF Nears $150 Billion as Assets Reach All-Time High]
Over the long term, the ETF fee war has become more of a marketing move in order to keep up with the competition. Some industry observers think it’s simply a matter of time until some of the largest ETFs are free, reports Steve Garmhausen for Barron’s. However, investors should not base an ETF purchase on price alone, there are many other factors that play into the equation of an outperforming fund. [Investor, Know Thy ETF]
“There are other implicit transaction costs to consider. For example, investors also should assess bid/ask spreads before buying and selling shares of an ETF. As a general rule of thumb, ETFs with large asset bases and high trading volumes generally will have lower bid/ask spreads than smaller ETFs with lower trading volumes,” Timothy Strauts wrote for Morningstar.
True, low fees do play a role in performance, since the cost of operating and investing in an ETF is subtracted out of returns. Investors should consider the performance of an ETF before anything else. Efficient trades, low bid-ask spreads and tax treatment are especially pertinent for total return. [London Exchange Slashes Fees for ETF Market Makers: Report]
“A fund can have a low expense ratio but not ultimately outperform,” Christian Magoon, CEO of YieldShares said.
Operating expenses are another area investors must consider. Every trade that is executed costs the investor, so for those who trade frequently, an ETF can be expensive. The free-trade platform offered by Charles Schwab, Fidelity and TD Ameritrade are a cost-effective way to go. In fact, this feature alone is more valuable than a cheaper ETF that has higher operating costs.
Today, the average ETF costs 0.65% today, compared to the 0.56% charges in 2010, according to Morningstar data. Apparently, the higher costs niche or specialty ETFs are pushing the average higher even as large providers are cutting costs on large, broad-based ETFs. [Fee War Could Hit Specialty, Niche ETFs Next]
Tisha Guerrero contributed to this article.