An Effective, Inexpensive Broad Market ETF

Exchange traded fund providers have been slashing fees to dirt cheap levels. While cheap investments are an attractive draw, people should not solely invest in a fund based on low expense ratios. Still, there are some ETFs with rock-bottom fees that merit consideration by advisors and investors.

The Schwab U.S. Broad Market ETF (NYSEArca: SCHB), which charges just 0.03% per year, is one of those funds. At that expense ratio, an investor that allocates $10,000 to SCHB can expect to lose just $3 per year in fees. Plus, Schwab clients can enjoy added savings because SCHB is available on a commission-free basis on the Schwab ETF OneSource platform. [Schwab Responds to iShares Fee Cuts]

The cost of ETF investing is more than just a couple of basis points in the expense ratio. While low expense ratios are nice for keeping costs down in long-term buy-and-hold investments, investors should also consider other implicit costs. [How to Pick ETFs as Fee War Heats Up]

For instance, investors should consider tracking error, or how much an ETF’s return may diverge from the underlying benchmark index. A number of factors may contribute to the tracking divergence, including the wide market bid/ask spreads, portfolio optimization, internal trading costs, portfolio management styles and securities lending fees. These factors would help contribute to an ETF’s price divergence from its net asset value.

SCHB, which has $5.2 billion in assets under management, tracks the Dow Jones U.S. Broad Stock Market Index. The ETF has returned 12.2% over the past five years, an advantage of 35 basis points over the average fund in the Morningstar large blend category.