Since the launch of the first ETF almost 24 years back, the exchange traded fund industry attained great multitude. There are currently about 1,980 exchange traded products listed in the U.S., with almost $2.61 trillion in assets under management.
Investors can get an access to several asset classes through an ETFs which is basically a pool of securities, almost like mutual funds. The difference is that unlike mutual fund, ETFs trade throughout the day like a stock. Also, ETFs are considered less expensive and more tax efficient than mutual funds.
In fact, the ETF approach is less risky than the single stock picking approach as the basket method does not have any company-specific concentration risk. But probably no benefit is cheap. So, for a fund-related approach, expense ratio comes into the play unlike stocks. It is the yearly fee that all funds charge their buyers.
While there are a number of factors including the investment strategy and issuers that investors consider for before investing in ETFs, cost is an important factor that drives their investment decision. In the long run, cheaper funds can drastically outperform the expensive ones, at least when other factors remain constant.
Consider an expense ratio of 1%, a fund of $10,000 invested at 8% annual return will grow to $19,672 in 10 years, while the same fund invested at an expense ratio of 0.1% will grow by a higher amount of $21,390. The difference between the returns will zoom on increasing the holding period.
Considering the same parameters, with an expense ratio of 0.1%, the fund of $10,000 will grow to $97,869 in 30 years (at the same 8% rate of return). The same fund will however grow to a much lesser value of $76,123 with an expense ratio of 1%.
And the price war among issuers became worse lately with competition on the rise. So far, the lowest cost corner was ruled by Charles Schwab and Vanguard. But now other players like BlackRock are also resorting to fee cut routes to grab market share. In 2016, Fidelity slashed fees equally across 11 sector ETFs to 8.4 bps from 12 bps, marking a decrease of 3.6 bps (read: BlackRock Slashes Fees, ETF Price War Intensifies).
Apart from market share, cheap ETFs should now be in focus as the Labor Department’s new fiduciary rule requires financial advisors to keep the “best interest” of their clients ahead of their own at the time of selling retirement products (read: Looking for Inexpensive Dividend ETFs? Here They Are).
Against such a backdrop, we have highlighted five ETFs with ultra-low expense ratios that can be considered at the current operating backdrop.
Schwab U.S. Broad Market ETF (SCHB - Free Report) – 0.03%
With stocks ruling the market post Trump win, a broader market stock ETF demands a position inn your portfolio.
iShares 0-5 Year TIPS Bond ETF (STIP - Free Report) – 0.10%
With rising inflationary backdrop, a look at Treasury Inflation Protected Securities or TIPS could be fruitful.
iShares Core Dividend Growth (DGRO - Free Report) –0.08%
iShares cut DGRO’s fees from 0.12% to 0.8%. This Zacks Rank #2 (Buy) ETF offers exposure to U.S. equities consistently increasing dividends (read: Buy These ETFs as BlackRock Cuts Fees).
Vanguard High Dividend Yield ETF (VYM - Free Report) – 0.09%
Investors looking for solid current income on a regular basis can try this Zacks Rank #2 high dividend ETF. The fund yields about 2.91% as of January 18, 2017 (read: Maximize Return: Buy These High Yield Cheap Dividend ETFs).
Fidelity Quality Factor ETF (FQAL - Free Report) – 0.29%
With uncertainty lingering in the market on Trump’s policy layout, currency strength, the Fed’s next moves, Brexit and oil price volatility, a look at a quality ETF like FQAL makes sense (read: 6 Quality ETFs to Sail Through Uncertain Markets).
iShares Edge MSCI Minimum Volatility USA Small-Cap ETF (SMMV - Free Report) – 0.20%
This Zacks Rank #2 low volatility ETF also needs a place in investors’ portfolio if volatility flares up. Also, small-cap stocks should be in focus this year given the rising greenback and an improving U.S. economy.
Vanguard Value ETF (VTV - Free Report) – 0.08%
This fund too has a Zacks Rank #2 and gives exposure to value stocks in this apparently overvalued U.S. market.
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