{"id":2889,"date":"2022-05-06T16:36:04","date_gmt":"2022-05-06T16:36:04","guid":{"rendered":"http:\/\/blog.valuengine.com\/?p=2889"},"modified":"2022-05-06T16:36:04","modified_gmt":"2022-05-06T16:36:04","slug":"why-pay-more-for-your-investments","status":"publish","type":"post","link":"http:\/\/blog.valuengine.com\/index.php\/why-pay-more-for-your-investments\/","title":{"rendered":"Why Pay More for Your Investments?"},"content":{"rendered":"

Consumers have never been happy about paying more for the same (or less) from one place than from another.\u00a0 It has only been within the past twenty years or so that investors have gotten wiser to this practice. Financial advisors, planners and the media have increasingly made investors more aware of how much less expensive and tax-efficient ETFs are than mutual funds using the traditional redeem-at-distributor structure.\u00a0 When one adds in tax-efficiency, faster clearing and settlement, intraday liquidity and zero redemption fees, there is almost no reason to pay up for new purchases of traditionally structured mutual funds.<\/span><\/p>\n

All of the approximately 5,000 stocks, 16 sector groups, 140 industries, and 500 ETFs have been updated on <\/b>www.ValuEngine.com<\/b><\/a><\/h5>\n
Free Two Week Trial to all 5,000 plus equities and ETFs covered by ValuEngine <\/b>HERE<\/b><\/a><\/h5>\n

What some find surprising is that there are cost differences, sometimes significant, between expense ratios of ETFs that are identical in terms of which securities they hold.\u00a0 There are at least four categories of ETFs where the better-known ETFs are more expensive than substitutes with enough liquidity to satisfy the needs of most investors.\u00a0<\/span><\/p>\n

Example No. 1:<\/span><\/p>\n

Let\u2019s start with the oldest still-offered US ETF and by far the largest, SPDR S&P 500 ETF Trust, <\/span>SPY.\u00a0 <\/b>Part of the SPDR-branded family by State Street Global Advisors (SSgA), <\/span>SPY<\/b> has more than $370 Billion assets under Management (AUM) although it briefly topped $400 Billion before 2022 market declines.\u00a0 As the standard-definer of passive index funds, <\/span>SPY <\/b>owns all the stocks in the S&P 500 Index weighted by float-adjusted market capitalization. Its expense ratio is 0.095% also called 9-1\/2 basis points (1\/100 of 1%) using industry vernacular to compare ETF fees.<\/span><\/p>\n

There are two other very large ETFs that also track the S&P 500 Index included in this analysis:\u00a0<\/span><\/p>\n

IVV<\/b>, iShares Core S&P 500 ETF from BlackRock with an expense ratio of 3 Basis points.<\/span><\/p>\n

VOO<\/b>, Vanguard 500 Index Fund also with an expense ratio of 3 basis points.<\/span><\/p>\n

Current ValuEngine reports on these ETF\u2019s can be viewed <\/b>HERE<\/b><\/a><\/h5>\n

There are other key relative shortcomings that SPY has compared with these alternative ETFs.<\/b>\u00a0 <\/span>SPY <\/b>was created using a Unit Investment Trust structure and its constituent changes are ordered by its Master Trustee and must be traded on the effective date of the S&P 500 Index change.\u00a0 The trust cannot lend securities or reinvest dividends. <\/span>IVV <\/b>and <\/span>VOO <\/b>are funds and have portfolio managers in lieu of the more constrained Master Trustee.\u00a0 reinvest dividends and lend stock shares to generate extra income.\u00a0 <\/span>IVV <\/b>and <\/span>VOO <\/b>also have more latitude on how and when the fund executed its trades regarding announced constituent changes.\u00a0\u00a0<\/span><\/p>\n

The result has been an extra few basis points per year in realized return for <\/span>IVV <\/b>and <\/span>VOO <\/b>than for <\/span>SPY <\/b>during the past 10 years.\u00a0 This table shows the annualized return comparisons for 1- 3- 5- and 10-year periods ending 04\/29\/2022:<\/span><\/p>\n

 <\/p>\n\n\n\n\n\n\n
ETF<\/b><\/td>\nExpense Ratio<\/span><\/td>\nAssets Under Mgmt. (AUM)<\/span><\/td>\nYear-to-Date<\/span><\/td>\n12-month<\/span><\/p>\n

Tot. Ret.<\/span><\/td>\n

3-Year Ann.<\/span><\/p>\n

Tot. Ret.<\/span><\/td>\n

5-Year Ann.<\/span><\/p>\n

Tot. Ret.<\/span><\/td>\n

10-Year Ann.<\/span><\/p>\n

Tot. Ret.<\/span><\/td>\n

Incept.<\/span><\/p>\n

MM\/YYYY<\/span><\/td>\n<\/tr>\n

SPY<\/b><\/td>\n0.095%<\/span><\/td>\n$375 B<\/b><\/td>\n-11.86%<\/span><\/td>\n1.26%<\/span><\/td>\n14.30%<\/span><\/td>\n13.81%<\/span><\/td>\n13.67%<\/span><\/td>\n01\/1993<\/b><\/td>\n<\/tr>\n
IVV<\/b><\/td>\n0.030%<\/i><\/b><\/td>\n$296 B<\/span><\/td>\n-11.84%<\/i><\/b><\/td>\n1.31%<\/i><\/b><\/td>\n14.34%<\/i><\/b><\/td>\n13.89%<\/span><\/td>\n13.77%<\/span><\/td>\n05\/2000<\/span><\/td>\n<\/tr>\n
VOO<\/b><\/td>\n0.030%<\/i><\/b><\/td>\n$260 B\u00a0<\/span><\/td>\n-11.84%<\/i><\/b><\/td>\n1.31%<\/i><\/b><\/td>\n14.34%<\/i><\/b><\/td>\n13.90%<\/b><\/td>\n13.79%<\/b><\/td>\n09\/2010<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

 <\/p>\n

Although 0.125% per year may not seem enormous, after 30 years of compounding, the gross difference is 45%.\u00a0 This can be a substantial amount when dealing with large sums of money.\u00a0 The bottom line is that if your costs are lower and you own precisely the same assets, you will make more money per year and, over time, the compounded difference will expand substantially.<\/span><\/p>\n

Example No. 2:<\/span><\/p>\n

The next comparison involves ETFs using the best-known small cap index, the Russell 2000 Index (published by FTSE Russell Indices).\u00a0 This index bypasses the top 1000 US Equities ranked by float-adjusted market capitalization meeting its requirements in order to track the 1001<\/span>st<\/span> through 3000<\/span>th<\/span> such stocks.<\/span><\/p>\n

The oldest and most popular Russell 2000 ETF is <\/span>IWM<\/b>, the iShares Russell 2000 ETF owned by Blackrock.\u00a0 Its direct competitor tracking the identical index\u2019s holdings and weights is <\/span>VTWO <\/b>(\u201cvee 2\u201d), the Vanguard Russell 2000 ETF. <\/span>VTWO <\/b>has an expense ratio of 10 basis points which is just over half of the 19 basis points charged by <\/span>IWM.\u00a0\u00a0<\/b><\/p>\n

There is a technical disclosure on the fungibility from one to the other. Since some of the smaller stocks may be difficult to acquire at times, both ETF\u2019s prospecti allow for optimization and substitution so that they may not actually hold the identical securities and weights on a given day but are expected to substantially provide the same price-and-yield returns as the Russell 2000 Index.\u00a0 Let\u2019s look at the comparison table:<\/span><\/p>\n

\u00a0\u00a0<\/span><\/p>\n\n\n\n\n\n
ETF<\/b><\/td>\nExpense Ratio<\/span><\/td>\nAssets Under Mgmt. (AUM)<\/span><\/td>\nYear-to-Date<\/span><\/td>\n12-month<\/span><\/p>\n

Tot. Ret.<\/span><\/td>\n

3-Year Ann.<\/span><\/p>\n

Tot. Ret.<\/span><\/td>\n

5-Year Ann.<\/span><\/p>\n

Tot. Ret.<\/span><\/td>\n

10-Year Ann.<\/span><\/p>\n

Tot. Ret.<\/span><\/td>\n

Incept.<\/span><\/p>\n

MM\/YYYY<\/span><\/td>\n<\/tr>\n

IWM<\/b><\/td>\n0.190%<\/span><\/td>\n$55 B<\/b><\/td>\n-15.82%<\/span><\/i><\/td>\n-17.37%<\/span><\/td>\n6.98%<\/span><\/td>\n7.14%<\/span><\/td>\n10.06%<\/span><\/td>\n05\/2000<\/b><\/td>\n<\/tr>\n
VTWO<\/b><\/td>\n0.100%<\/b><\/td>\n$6 B<\/span><\/td>\n-15.82%<\/span><\/i><\/td>\n-17.27%<\/b><\/td>\n7.14%<\/b><\/td>\n7.26%<\/b><\/td>\n10.10%<\/b><\/td>\n10\/2010<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

 <\/p>\n

Once again, the less expensive alternative has provided higher returns.\u00a0<\/span><\/p>\n

Example No. 3:<\/span><\/p>\n

Turning to fixed income, there are two long-term US Treasury Bond ETFs benchmarked to the Bloomberg Long-Term Treasury Index that have been in existence for more than 10 years.\u00a0 The older of the two is <\/span>SPTL<\/b>, the SPDR Portfolio Long Term Treasury ETF.\u00a0 The newer entry is <\/span>VGLT, <\/b>the Vanguard Long-Term Treasury Index ETF, which charges a 50% lower fee. It is just 4 basis points as compared with the 6 basis points charged by <\/span>VGLT.\u00a0 <\/b>There is another technical disclosure to be made here in that the holdings of <\/span>SPTL <\/b>and <\/span>VGLT <\/b>may not be 100% identical at all times. It is generally not possible to perform full replication with most bond index ETFs.\u00a0 Therefore, both sponsors use a combination of partial replication and optimization to produce results substantially similar to the price and yield performance of the Bloomberg Long-Term Treasury Index.\u00a0 At times, one or the other may be higher before expenses are taken into account.\u00a0 Here is the comparison:<\/span><\/p>\n

 <\/p>\n\n\n\n\n\n
ETF<\/b><\/td>\nExpense Ratio<\/span><\/td>\nAssets Under Mgmt. (AUM)<\/span><\/td>\nYear-to-Date<\/span><\/td>\n12-month<\/span><\/p>\n

Tot. Ret.<\/span><\/td>\n

3-Year Ann.<\/span><\/p>\n

Tot. Ret.<\/span><\/td>\n

5-Year Ann.<\/span><\/p>\n

Tot. Ret.<\/span><\/td>\n

10-Year Ann.<\/span><\/p>\n

Tot. Ret.<\/span><\/td>\n

Incept.<\/span><\/p>\n

MM\/YYYY<\/span><\/td>\n<\/tr>\n

SPTL<\/b><\/td>\n0.060%<\/span><\/td>\n$5.4 B<\/b><\/td>\n-17.29%<\/span><\/i><\/td>\n-11.30%<\/span><\/td>\n0.97%<\/span><\/i><\/td>\n1.89%<\/b><\/td>\n2.61%<\/span><\/td>\n05\/2007<\/b><\/td>\n<\/tr>\n
VGLT<\/b><\/td>\n0.040%<\/b><\/td>\n$3.8 B<\/span><\/td>\n-17.26%<\/b><\/td>\n-11.26%<\/b><\/td>\n0.97%<\/span><\/i><\/td>\n1.87%<\/span><\/td>\n2.65%<\/b><\/td>\n11\/2009<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n
<\/h5>\n
Current ValuEngine reports on these ETF\u2019s can be viewed <\/b>HERE<\/b><\/a><\/h5>\n

This comparison in net total returns is not nearly as cut-and-dried as it was with the two equity ETF comparisons.\u00a0 Bond trading and liquidity is much less standardized and dependable than the equity markets.\u00a0 In this case, the older and more expensive ETF from SPDR actually outperformed in the 5-year period and tied in the 3-year period.\u00a0 <\/span>VGLT <\/b>outperformed in the two most recent periods and the 10-year period so coupled with the lower fee, <\/span>VGLT <\/b>still comes out as the better buy over <\/span>SPTL <\/b>in this analysis based on this week\u2019s data. For someone who owns <\/span>SPTL <\/b>already, however, there is probably not enough of a difference to justify making the switch.<\/span><\/p>\n

Example No. 4:<\/span><\/p>\n

The most dramatic example of needing to read the fact sheets and prospecti deals with Exchange Traded Products (ET<\/span>P<\/b>s) that hold depository receipts on gold bullion. Most advisors and investors believe that <\/span>GLD, <\/b>SPDR Gold Trust by SSgA is the ETF they should buy if an allocation to gold needs to be added or increased in a portfolio.\u00a0 Much better alternatives exist based on this type of discussion.<\/span><\/p>\n

ETFs are 40-Act mutual funds whose shares trade on the exchange and do not accept daily cash redemptions except in creation-size units.\u00a0 Not all ETPs are ETFs.\u00a0\u00a0<\/span><\/p>\n

GLD<\/b> is not an ETF at all.\u00a0 Its structure is a grantor trust and its tax treatment when sold is at the higher level of a collectible in lieu of capital gains on a stock (the IRS considers gold a collectible and taxes capital gains on collectibles at a higher rate for many investors \u2013 you may wish to consult a tax expert).\u00a0\u00a0<\/span><\/p>\n

Now, let\u2019s get back to the fees.\u00a0 GLD, SPDR Gold Shares, is by far the largest Exchange Traded Product to own gold with nearly $60 billion in the trust.\u00a0 It is also the most widely traded, a point often used to justify paying its high fee of 0.40%.\u00a0\u00a0<\/span><\/p>\n

The fact is that there are three major alternatives that have been in the market for more than three years with much lower fees:<\/span><\/p>\n