Exchange Traded Funds: Lowest Cost Wins

By on June 19, 2012

Mutual Funds - Inflows and CostsInvestors seem to be wising up in their choice of funds to invest in. Index Universe revealed fund flows in 2011 were heavily skewed towards Exchange Traded Funds (ETFs) versus traditional higher cost mutual funds as twice as many investor dollars flowed their way ($119 billion vs. $59 billion). However, it will take a long time for ETFs to catch up to old-style mutual fund’s overall assets since they still lag far behind (approximately $1 trillion compared to $7.7 trillion).

The site ETF Database, or ETFdb, has come up with a handy list of the lowest cost ETFs in a wide variety of categories. Currently, the lowest cost ETFs they’ve identified are the Focus Morningstar US Market Index ETF (FMU), Focus Morningstar Large Cap Index ETF (FLG), and the Vanguard S&P 500 ETF (VOO); each with a remarkably low annual expense ratio of .05%.

After reviewing the list there are a couple of observations I’d like to share. ETFdb has a category “Japan Equities” showing the cheap ETF being Japan Hedged Equity Fund (DXJ), a WisdomTree fund. DXJ has an annual expense ratio of 0.48%. ETFdb lists Vanguard’s Pacific ETF (VPL) as the cheapest Asia Pacific equities ETF with a 0.14% expense ratio. 58% of VPL’s assets are invested in Japanese equities so it is largely a proxy for the Japanese stock market, at a far lower cost than DXJ.

ETFdb’s Bond/Fixed Income ETFs categories are missing a long-dated national muni bond fund. They identify the Market Vectors Short Municipal Index ETF (SMB) as the lowest cost national muni fund, but the average years to maturity on this fund is approximately 4 years, therefore the yield is low (currently under two percent). I know of two longer dated national muni ETFs, the S&P National AMT-Free Municipal Bond Fund (MUB) and SPDR Nuveen Barclays Capital Muni Bond (TFI), both currently yielding over three percent. The annual expense ratios on these funds are 0.25% for MUB and 0.22% for TFI. There is a big difference in a short dated bond fund versus a long dated one in terms of volatility.

Disclosure: I currently own shares of VPL and MUB.

Sources: IndexUniverse, ETF Database

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