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As any exchange-traded fund investor knows, the cost can be a fraction of your invested assets.
In some cases, different providers (i.e. Vanguard, state street, charles schwabetc. — since they track the same index (such as the S&P 500), you may want to choose the cheapest one. But experts say it’s important to consider more than just the cost when choosing a fund to invest in.
“ETFs that compete on price are typically index trackers that charge the lowest fees in their category,” said Dan Sotiroff, senior analyst at Morningstar. “So other considerations will ultimately determine the investment decision.”
Generally, the lower the fees, the higher the profit
ETFs are gaining traction as an alternative to traditional mutual funds as a way to add money to your investment basket. Advantages of ETFs include generally lower costs, higher tax efficiency, and intraday trading. These funds now have about $13.2 trillion in assets, up from $1 trillion at the end of 2010, according to Morningstar Direct.
The cost of investing in a fund is called the expense ratio and is expressed as a percentage of assets. According to Morningstar, the average expense ratio for passively managed ETFs (those that track an index and whose performance generally reflects the index’s profit or loss) is 0.14%. For actively managed ETFs (those helmed by managers who make strategic changes to the fund’s investments), that number is 0.44%.
These numbers are important to investors. This is because costs can eat into profits and have a long-term impact on asset growth.
For example, a Securities and Exchange Commission analysis shows that if you invest $100,000 over 20 years with a 4% annual growth rate and a 1% annual fee, you’ll end up with about $180,000, compared to about $220,000 with no fees at all. Therefore, the lower the expense ratio, the less impact it will have on investment returns.
Research shows that people saving for retirement need all the help they can get. According to BlackRock’s 2025 Retirement Study, two-thirds of savers, or 66%, are worried about running out of money in retirement.
Sometimes it’s better to stick with one ETF provider
Sotilov said that while fees are important, there are other aspects to consider when it comes to ETFs. This includes the effects of mixing and matching between different ETF providers.
That’s because there are nuances in how companies compose the index, he said. For example, if you own a Vanguard ETF focused on large-cap stocks and want to combine it with a small-cap ETF, Sotilov said you’d be better off using Vanguard’s product.
“The size breakpoints that distinguish the large- and small-cap segments of these ETFs do not necessarily match the breakpoints of similar ETFs, even if they target roughly the same market segment,” Sotilov said.
For example, he said, mixing ETFs from one fund company with ETFs from another could result in over- or underweighting some stocks or sectors and not giving you the risk/return exposure you’re looking for.
In such situations, “as a general rule, investors should stick with one provider,” Sotilov said.
Liquidity can also make a difference
Liquidity can also be important. If an ETF is trading thinly, it may have a hard time unloading quickly, and the difference between the buy price (what buyers are willing to pay) and the ask price (how much sellers want to get) can become large.
Kyle Playford, a certified financial planner with Freedom Financial Partners in Oakdale, Minn., said you need to evaluate the bid-ask spread and average daily trading volume.
“Look for spreads that are only a few cents,” Playford says. “As spreads widen, liquidity can decrease.”
And, “the higher the (trading) volume, the more liquid the ETF will typically be,” he said.
On the other hand, there may be other ETFs that perform better than the one with the lowest expense ratio. For example, you might be able to find an actively managed ETF that performs well enough to justify a higher cost than a passively managed index ETF, if the difference isn’t large enough, Playford said.
“There are opportunities in equity, emerging markets, international and sometimes small- and mid-cap ETFs, with actively managed ETFs outperforming passively managed ETFs,” Playford said.
“Prices are high, but over the long term, aggressive stock selection can outperform, especially when markets are more volatile,” he said. Managers “have some ability to buy and sell their holdings rather than simply following an index.”
For example, Avantis Emerging Markets Equity ETF (ticker: Avem) is actively managed and has an expense ratio of 0.33%. Last year, it increased by more than 33%. This and Vanguard’s passively managed emerging market equity ETF (ticker: VWO) has an expense ratio of just 0.07%, but a one-year return of less than 25%.
