Of the many advantages of exchange traded funds over actively managed funds, including superior tax efficiency and intraday liquidity, fees or lack thereof is among the most highlighted. While not all ETFs are inexpensive at the pure fee level, data indicate the average expense ratio on ETFs resides in the area of 0.6% per year, or less than half the average annual expenses on actively managed mutual fee.
Of course, ETF issuers have used their products’ low costs to their marketing advantage and as the industry has matured, there has been increasing talk of cost competition and fee wars among some of the largest issuers.
Advisors and investors can further pare their total cost of ownership experience by buying and selling a growing number of ETFs on various commission-free platform offered by some of the biggest names in the brokerage business. Several of the ETFs mentioned here are available on various commission-free platforms. All are among the lowest cost equity-based ETFs on the market today.
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Vanguard Small Cap ETF (NYSEArca: VB)
Expense Ratio: 0.09%
Comment: The ETF provides a cheap way to access a broad group of small companies, covering 1,482 small capitalization stocks. Small-caps have historically provide some diversification benefits and have generated greater returns that large-caps over the long-term. However, the asset category is more sensitive to short-term cycles. Alternatively, the Vanguard Small-Cap Growth (NYSEArca: VBK), which follows companies whose earnings are expected to be higher-than-average, and Vanguard Small-Cap Value ETF (NYSEArca: VBR), which includes stocks that trade at a lower price relative to fundamentals, both come with a 0.09% expense ratio as well.
Vanguard FTSE Developed Markets ETF (NYSEArca: VEA)
Expense Ratio: 0.09%
Comment: VEA tracks a broad 1,390 company stocks from developed economies outside of North America, including European markets and Asian equities. The ETF may provide a cheap portfolio diversifier for investors who are heavy on U.S. equities and access oversea growth opportunities. However, the fund does not hedge currency risk, so a stronger dollar or weaker foreign currencies could slightly diminish returns.
iShares Core U.S. Growth ETF (NYSEArca: IUSG)
Expense Ratio: 0.09%
Comment: Formerly known as the Russell 3000 Groth ETF (IWZ), IUSG still tracks the broad Russell 3000 Growth index but iShares re-branded the ETF to fit in with its new line of so-called Core ETF strategies for building a diversified core investment portfolio. As a growth stock ETF, IUSG tracks the faster-growing half of the Russell 3000. On the other hand, the iShares Core U.S. Value ETF (NYSEArca: IUSV), which also has a 0.09% expense ratio, tracks the value portion of the Russell 3000. [iShares to Make Significant Additions to Core Lineup]
Schwab US REIT ETF (NYSEArca: SCHH)
Expense Ratio 0.07%
Comment: SCHH is the cheapest real estate investment trust-related ETF on the market. The ETF is comprised of REITs weighted by float-adjusted market cap, but it excludes mortgage- and timber-related REITs. REITs provide investors a liquid way to participate in the real estate market and offer some attractive yields. However, looking ahead, the space will face some headwinds in a rising rate environment as higher rates make debt servicing more expensive.
iShares Core S&P Total US Stock Market ETF (NYSEArca: ITOT)
Expense Ratio: 0.07%
Comment: ITOT is seen as broad U.S. equity allocation, covering the broad S&P 1500 index. Compared to other total market stock indices, the S&P 1500 index does not hold as much small- or micro-cap stocks. When compared to the S&P 500, the S&P 1500 index takes on more mid- and small-cap exposure.
Schwab US Dividend Equity ETF (NYSEArca: SCHD)
Expense Ratio: 0.07%
Comment: SCHD is the cheapest dividend-focused ETF on the market. The ETF also implements a quality tilt, targeting large companies that have paid out dividends in each of the past 10 consecutive years. Additionally, component holdings are also selected based on fundamental factors like cash flow and debt, return on equity, dividend growth and dividend yield. [A Dividend ETF With a Quality Bias]
Vanguard Total Stock Market ETF (NYSEArca: VTI)
Expense Ratio: 0.05%
Comment: VTI also includes broad, diversified equity exposure. The ETF tracks the CRSP U.S. Total Market Index and holds 3,765 component stocks. As the name suggests, the fund holds pretty much everything in the U.S. markets, with at least a $10 million market-cap, weighted by market capitalization. However, the index may exclude business development companies, American Depository Receipts, royalty trusts and limited partnerships.
Schwab U.S. Broad Market ETF (NYSEArca: SCHB)
Expense Ratio: 0.04%
Comment: Lastly, SCHB is the cheapest broad U.S. market-related ETF. The fund includes 2,026 stock components weighted by market-cap. However, since the ETF shows a lower average daily trading volume than the larger broad stock ETFs, SCHB may incur higher implicit costs through wider bid-ask spreads. A wider spread on ETFs can also indirectly lower returns on trade executions. According to Morningstar, the fund has an average daily volume of 416,434 shares.