Looking Beyond Fees With ETFs

One of the primary selling points with exchange-traded funds has been and continues to be low fees. In many cases, index funds and ETFs offer expense ratios that are well below those offered by competing actively managed mutual funds, a trait that matters, particularly to long-term investors.

Investors' preference low-fee ETFs is on display again this year as many of 2017's top asset-gathering ETFs are low fee products with many of those funds having annual expense ratios of 0.1 percent or less. However, fees are only part of the ETF equation. Investors should also assess trading costs, such as bid/ask spreads before committing capital to a particular ETF.

“While CFRA incorporates expense ratios in our equity and bond ETF rankings, with lower-cost offerings scoring higher than more expensive ones, this is just one factor in our analysis,” said CFRA Research Director of ETF & Mutual Fund Research Todd Rosenbluth in a note out Tuesday. “In particular, we think investors need to pay attention to the bid/ask spread as trading costs can similarly eat into returns.”

Low Fees, Tight Spreads

The iShares Core U.S. Aggregate Bond ETF AGG, the largest fixed income ETF trading in the U.S., is an example of a low-fee ETF with tight spreads, helping investors realize additional cost savings.

“AGG also has one of the strongest cost factor ranking inputs, aided by its low 0.05 percent net expense ratios and $0.01 bid/ask spread,” said Rosenbluth. “However there are other ETFs tracking the prominent investment-grade Bloomberg Barclays Aggregate Index with both lower and higher expense ratios and trading-related costs.”

AGG holds over 6,300 bonds and has an effective duration of 5.7 years. The ETF has a 30-day SEC yield of 2.2 percent and has seen year-to-date inflows of $6.8 billion, the second-best asset-gathering pace among all bond ETFs.

Even Cheaper

When every penny matters, there is the Schwab U.S. Aggregate Bond ETF SCHZ, which is slightly cheaper than the rival AGG. The $4 billion SCHZ and AGG also compete with the $1.1 billion SPDR Bloomberg Barclays Aggregate Bond ETF BNDS.

SCHZ has a lower 0.04 percent expense ratio, while the $1.1 billion SPDR Bloomberg Barclays Aggregate Bond ETF has a higher 0.08 percent expense ratio,” said Rosenbluth. “Yet, CFRA thinks the higher $0.02 and $0.05 trading costs for SCHZ and BNDS, respectively, is notable particularly if an investor plans to use the ETF to periodically tactically tilt asset allocations.”

CFRA rates SCHZ Overweight and AGG Market Weight.

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