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Since the launch of the first ETF about 25 years back, the exchange traded fund industry has attained great heights. There are currently about 2,021 exchange traded products listed in the United States, with almost $3.91 trillion worth of assets under management (read: U.S. ETFs Hit $4 Trillion in AUM: 4 Reasons Behind the Boom).
Investors can access several asset classes through ETFs, which are basically a pool of securities, almost like mutual funds. However, unlike mutual funds, ETFs trade throughout the day like a stock. Also, ETFs are considered less expensive and more tax efficient.
In fact, the ETF approach is less risky than the stock picking approach as the basket method does not have any company-specific concentration risk. But probably no benefit comes for free. So, for a fund-related approach, expense ratio comes into play unlike stocks. It is the yearly fee that all funds charge their buyers.
While there are a number of factors that investors consider before investing in ETFs, cost is an important factor that drives their investment decision. In the long run, cheaper funds can handily outperform 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%, a 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 intensified of late owing to rising competition. For a long period of time, the lowest cost corner was ruled by Charles Schwab and Vanguard. But now other players like BlackRock are resorting to fee cuts to grab market share (read: Vanguard Intensifies ETF Fee War Again).
Against such a backdrop, we have highlighted five ETFs with ultra-low expense ratios that can be considered at the current operating backdrop.
The underlying Morningstar US Target Market Exposure Index is a free float adjusted market capitalization weighted index which consists of equity securities primarily traded in the United States.
The underlying CRSP US Total Market Index representing nearly 100% of the U.S. investable equity market covers nearly 4,000 constituents across mega, large, small and micro capitalizations.
The underlying Dow Jones U.S. Broad Stock Market Index includes the largest 2,500 publicly traded U.S. companies for which pricing information is readily available. The index is a float-adjusted market capitalization weighted index that reflects the shares of securities actually available to investors in the marketplace.
The underlying Dow Jones U.S. Large-Cap Total Stock Market measures all U.S. equity securities. The index includes approximately the largest 750 stocks and is float-adjusted market-capitalization weighted.
Image: Bigstock
5 Low-Cost ETFs to Buy as Every Penny Counts
Since the launch of the first ETF about 25 years back, the exchange traded fund industry has attained great heights. There are currently about 2,021 exchange traded products listed in the United States, with almost $3.91 trillion worth of assets under management (read: U.S. ETFs Hit $4 Trillion in AUM: 4 Reasons Behind the Boom).
Investors can access several asset classes through ETFs, which are basically a pool of securities, almost like mutual funds. However, unlike mutual funds, ETFs trade throughout the day like a stock. Also, ETFs are considered less expensive and more tax efficient.
In fact, the ETF approach is less risky than the stock picking approach as the basket method does not have any company-specific concentration risk. But probably no benefit comes for free. So, for a fund-related approach, expense ratio comes into play unlike stocks. It is the yearly fee that all funds charge their buyers.
While there are a number of factors that investors consider before investing in ETFs, cost is an important factor that drives their investment decision. In the long run, cheaper funds can handily outperform 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%, a 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 intensified of late owing to rising competition. For a long period of time, the lowest cost corner was ruled by Charles Schwab and Vanguard. But now other players like BlackRock are resorting to fee cuts to grab market share (read: Vanguard Intensifies ETF Fee War Again).
Against such a backdrop, we have highlighted five ETFs with ultra-low expense ratios that can be considered at the current operating backdrop.
JPMorgan BetaBuilders U.S. Equity ETF (BBUS - Free Report) ) – 0.02%
The underlying Morningstar US Target Market Exposure Index is a free float adjusted market capitalization weighted index which consists of equity securities primarily traded in the United States.
Vanguard Total Stock Market ETF (VTI - Free Report) ) – 0.03%
The underlying CRSP US Total Market Index representing nearly 100% of the U.S. investable equity market covers nearly 4,000 constituents across mega, large, small and micro capitalizations.
Schwab U.S. Broad Market ETF (SCHB - Free Report) ) – 0.03%
The underlying Dow Jones U.S. Broad Stock Market Index includes the largest 2,500 publicly traded U.S. companies for which pricing information is readily available. The index is a float-adjusted market capitalization weighted index that reflects the shares of securities actually available to investors in the marketplace.
Schwab U.S. Large-Cap ETF (SCHX - Free Report) ) – 0.03%
The underlying Dow Jones U.S. Large-Cap Total Stock Market measures all U.S. equity securities. The index includes approximately the largest 750 stocks and is float-adjusted market-capitalization weighted.
Vanguard S&P 500 ETF (VOO - Free Report) ) – 0.03%
The underlying S&P 500 Index measures the performance of the large-capitalization sector of the U.S. equity market.
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