Chances are, when you're evaluating mutual funds as possible investments, you know to look at fees (in the form of loads and expense ratios). (Expense ratios are essentially annual fees.) But when it comes to exchange-traded funds (ETFs), those part-fund, part-stock beasts, many people drop the ball. They just assume that the fees will be reasonable, perhaps because ETFs generally have a reputation for being cost-effective.
But not all ETFs are the same, at least in regard to their fees. As Matthew Hougan of Index Universe recently noted, there are lots of puzzling pairs of ETFs out there. The pairs invest in pretty much the same holdings, and charge significantly different fees for their services. They're puzzling because the ones with the higher fees tend to have amassed the most assets. Investors seem to prefer paying higher expenses.
For example, look at the iShares MSCI Emerging Markets (NYSE: EEM) and Vanguard Emerging Markets (AMEX: VWO) ETFs. The former charges 0.75% per year, while the latter charges 0.30%. The former, though, recently was four times as big as the latter. In case you're thinking that a 0.45% difference isn't such a big deal, let's imagine that you have $10,000 invested in each of the ETFs, and that they each earn an annual average return of 10% per year for a decade. Subtracting the fees, they'll earn 9.25% and 9.7%, respectively. The iShares ETF will grow to $24,222, while the Vanguard ETF will grow to $25,239. That's a difference of more than $1,000!
The same story
It's the same with regular mutual funds -- including index funds. Let's consider the noble S&P 500 index fund, for example. Vanguard, known for its low fees, among other things, has long offered an S&P 500 index fund, sporting an expense ratio of 0.15%. These days, though, every Thomas, Richard, and Harold on Wall Street offers an S&P 500 index fund, with a wide range of expense ratios:
|
Fund |
Expense ratio |
|---|---|
|
Vanguard S&P 500 Index (VFINX) |
0.15% |
|
UBS S&P 500 Index A (PSPIX) |
0.70% (plus a 2.5% load!) |
|
American Beacon S&P 500 Index Plan (AAFPX) |
0.63% |
|
Allegiant S&P 500 Index A (AEXAX) |
0.60% (plus a 2.5% load!) |
|
Morgan Stanley S&P 500 Index A (SPIAX) |
0.58% (plus a 5.25% load!) |
|
Dreyfus S&P 500 Index (PEOPX) |
0.50% |
|
E*TRADE S&P 500 Index (ETSPX) |
0.09% |
I included that last fund (and there are scores of S&P 500 index funds out there) just to show you that there may be more low-fee funds around than you think. So don't think of paying as much as 0.70% per year (plus a one-time load fee) for the same mix of S&P 500 companies like Amgen (Nasdaq: AMGN) and Monsanto (NYSE: MON) that you can get a lot cheaper elsewhere.
You can also invest in the S&P 500 inexpensively via ETFs. The iShares S&P 500 Index (NYSE: IVV) sports an expense ratio of 0.09%, while SPDRs (AMEX: SPY) sports fees of 0.08%.
The bottom line here: Keep looking at fees and seek out low ones. A slightly lower fee can make a world of difference to your bottom line.
Keep learning
Read all about ETFs and how they offer some valuable advantages over traditional mutual funds in our ETF Center. These articles may also be of interest:
If you'd like to aim higher than an index's return, consider seeking out some top-notch mutual funds. We'd love to introduce you to some, via our Motley Fool Champion Funds newsletter -- I've found a bunch of winners there for my own portfolio.
