As exchange traded fund providers fuel an ongoing fee war in an attempt to one-up each other to attract assets, investors should look beyond expense ratios and consider other factors that make an ETF suitable for their investment horizon.
Earlier this month, BlackRock (NYSE: BLK) trimmed the fees on seven of its iShares Core ETFs, with the Shares Core S&P Total US Stock Market ETF (NYSEArca: ITOT) showing an expense ratio of 0.03%. ITOT was the cheapest on the block for a brief moment. [The New Cheapest ETF In The U.S. Is A Familiar Face]
Not to be outdone, Charles Schwab lowered fees by one basis point on four of its large-cap ETFs in response, with the Schwab U.S. Large-Cap ETF (NYSEArca: SCHX) and Schwab U.S. Broad Market ETF (NYSEArca: SCHB) both coming in at a low 0.03% expense ratio. [Schwab Responds to iShares Fee Cuts]
The tit-for-tat fee cuts have been a way for many fund providers to attract long-term investment interest. As many ETF industry observers have seen, low fund fees have equated to increased asset inflows. Through October, Schwab has seen 24% more inflows than last year’s $8.8 billion, reports Crystal Kim for Barron’s. Inflows at BlackRock and Vanguard, while far larger, fell behind last year’s inflows of 11% and 26%, respectively.
However, for investors, low fees is only a part of the overall picture. There are a number other factors than people should consider when committing to a long-term investment.
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.