Exchange traded fund sponsors are trying to one-up their competitors as they slash fees to attract investors. While the ongoing fee war helps investors reduce the cost of investing in ETFs, people should still consider the implicit costs of moving assets into a low-fee fund.
While an expense ratio is the simplest way to measure the cost of investing in an ETF, it is not the only consideration, writes Elizabeth MacBride for CNBC. For those who are seeking to change out more costlier investment options, the new low expense ratios should also justify the total cost of shifting around assets in a portfolio. [ETFs: Tax Efficient and Cheap Investment Vehicles]
Specifically, MacBride points out that investors should consider if shifting into cheap ETFs is worth it, how the new ETF investment performs, potential commissions to execute trades and the sustainability of an ETF with a low expense ratio. [The Total Costs of Owning, Trading ETFs]
Investors should calculate the breakeven point of shifting assets over to a low-fee fund. If you plan on holding onto the investment for a long period, the compounding effect of an investment with a low fee will help investors realize greater returns.
Nevertheless, people should also keep in mind that ETFs are not all created equal and will have varying performances. Rob Nestor, head of iShares product strategy at BlackRock, points out that two index-based ETFs in the same asset class can generate diverging performances due to the make-up of their underlying benchmarks or the way the ETFs are managed. For instance, the MSCI and FTSE are split over the classification of South Korea as an emerging or developed economy.