Looking Beyond ETF Expense Ratios

By Todd Rosenbluth, CFRA

While CFRA incorporates expense ratios in our equity and bond ETF rankings, with lower-cost offerings scoring higher than more expensive ones, this is just one factor in our analysis. In particular, we think investors need to pay attention to the bid/ask spread as trading costs can similarly eat into returns.

iShares Core US Aggregate Bond ETF (AGG) is the largest US listed bond ETF with $49 billion in assets. AGG also has one of the strongest cost factor ranking inputs, aided by its low 0.05% net expense ratios and $0.01 bid/ask spread. However there are other ETFs tracking the prominent investment-grade Bloomberg Barclays Aggregate Index with both lower and higher expense ratios and trading-related costs.

At quick glance, an investor could see that the $4 billion Schwab US Aggregate Bond ETF (SCHZ) has a lower 0.04% expense ratio, while the $1.1 billion SPDR Bloomberg Barclays Aggregate Bond ETF (BNDS) has a higher 0.08% expense ratio. Yet, CFRA thinks the higher $0.02 and $0.05 trading costs for SCHZ and BNDS, respectively, is notable particularly if an investor plans to use the ETF to periodically tactically tilt asset allocations. A fourth bond ETF, Vanguard Total Bond Market Index (BND) tracking a float adjusted Bloomberg Barclays Aggregate Index that excludes bonds held in Federal Reserve accounts, has a 0.05% expense ratio and a $0.01 bid/ask spread.

The above is a rare case where there are multiple ETFs tracking the same benchmark, but most ETFs seek to track a unique index and in some cases the indices can shift. To us, this makes an assessment of an ETF’s index tracking ability less meaningful.

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