25
COST
Even if there are several ETFs tracking
the same index, there can be large
divergences between vehicles when it
comes to costs.
For example, UK equities are a likely
asset class choice for any investor
putting together an investment
portfolio. According to data from
Morningstar there are twenty four
ETFs that track large cap UK equities,
fifteen of which track the main UK
equity index, the FTSE 100.
When taking a first look, the costs
vary considerably. The annual net
expense ratios range from 0.10% for
the Vanguard FTSE 100 ETF to 0.48%
for the iShares MSCI UK Large Cap
ETF. Don’t stop there, however.
Industry experts will tell you that a
total expense ratio – or TER – does not
cover the full cost.
‘Far more important is the tracking
of the fund versus the index,’ said
Michael John Lytle, chief development
officer at Source. ‘Paying a low fee can
become relatively irrelevant if the fund
is underperforming.’
The key measure is what’s known as
‘tracking difference,’ which compares
the return of the fund and the return
of its index over a one-year time
period. Looking at the same pool of
twenty four large cap UK equity ETFs
shows the power of this statistic.
Recorded on a cumulative annual basis
in Euros, the UBS FTSE 100 ETF and
iShares FTSE 100 trailed their indexes
by only 0.01%, yet this jumps to 0.29%
for the Source FTSE 100 ETF and
0.31% on the ComStage FTSE 100 TR
ETF.
CONSIDER TRADING COSTS
Finally, remember to consider trading
costs. Unlike mutual funds, you must
pay both a commission and a spread
when buying an ETF, just like when
you buy a stock. The wider the spread
– the difference between the bid and
the ask – the more it costs you to buy.
These costs can be prohibitive,
and can easily overwhelm small
differences in expenses.
SO CHOOSE CAREFULLY.
Used properly, ETFs can be
enormously valuable tools, offering
you institutional-quality exposures at
extraordinarily low prices.
But with 1,300+ choices, it pays
to take five minutes and dig a little
deeper to find the best fund to meet
your needs.
For more information, insight and
education in the use of ETFs as well
as a comprehensive glossary of terms
check out the LEARN section of
ETF.com
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clicking on the graphic below.
