How to Pick ETFs as Fee War Heats Up

It is still important to consider the underlying components of an ETF to gain a better sense of what one is holding. For example, ITOT’s new benchmark adds about 2,000 small- and micro-cap stocks to the fund, which make it a closer match to the Vanguard Total Stock Market ETF (NYSEArca: VTI), whereas SCHB leans toward large-cap value stocks with lower tilts toward small and micro value companies.

When investing in overseas ETFs, Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) and iShares Core MSCI Emerging Markets ETF (NYSEArca: IEMG) are both cheap options for emerging market exposure. However, investors should consider country weights and the indexing methodologies behind the options. Specifically, VWO’s underlying FTSE Russel index does not consider South Korea an emerging economy and has greater exposure to China as the underlying benchmark begins to add Chinese A-shares. [A First For Broad Emerging Market ETFs]

Additionally, since ETFs trade like stocks on a stock exchange, potential investors should consider implicit trading costs like liquidity and the bid/ask spread. For instance, the relatively new Vanguard Tax-Exempt Bond Index Fund (NYSEArca: VTEB) and the iShares National AMT-Free Muni Bond ETF (NYSEArca: MUB) both track the same benchmark, but VTEB comes with a cheap 0.12% expense ratio, or more than half the fees for MUB. However, VTEB is still gaining assets and only shows an average daily volume of about 41,000 shares, compared to MUB’s 290,000, according to Morningstar.

For more information on ETFs, visit our ETF 101 category.

Max Chen contributed to this article.