The Obsession With Low Expense Ratio ETFs

Year-to-date through February 20, 2018, SPEM and SCHE were the leaders of the quartet, up 5.0%, ahead of VWO’s 4.3% and IMG’s 3.5%. Yet, in 2017, SPEM generated a 35% total return, lagging IEMG’s 37% gain, but ahead of the 33% and 31% for SCHE and VWO, respectively.

The approximately 600 basis point differential between diversified emerging market ETFs highlights the importance of understanding what’s inside to CFRA Research. For example, SPEM has more exposure to China than the three emerging market ETF peers, but it does not have the exposure to South Korea that IEMG does. These four ETFs track indices from three different providers, unlike the above value trio all tracking the S&P 500 Value index. As such technology heavyweight Samsung Electronics can be found in IEMG, but not in SPEM.

While emerging market ETFs are constructed differently, CFRA thinks investors can focus more on the fees for certain other ETFs.  For example, assets in SPDR Portfolio S&P 500 Value tripled in size to $1.1 billion since mid-October, aided by more than $700 million of net inflows. SPYV’s fee was cut by 11 basis points to 0.04. In contrast, iShares S&P 500 Value and Vanguard S&P 500 Value, which own identical positions, but charge 18 and 15 basis points, respectively, gathered $220 million and zero assets in the same period. All three ETFs lost approximately 1% year-to-date through February 20, 2018, after rising 15% in 2017.

According to Matthew Bartolini, Head of SPDR Americas Research at State Street Global Advisors, the addition of the aforementioned SPDR Portfolio ETFs to a commission free platform helped to support asset growth with retail investors, but the 15 ETFs the firm cut fees on have also seen strong flows from institutional investors and were added to home-office ETF models at brokerage firms, encouraging advisor usage.

Todd Rosenbluth is Director of ETF & Mutual Fund Research at CFRA.