One of the reasons I love exchange-traded funds is the majority of the industries’ assets are concentrated in products with very low fees. Sure there are a few rogue funds out there with 2%+ expense ratios, but these are primarily relegated to the black corners of obscurity.
I’m more focused on companies such as Vanguard Total International Bond (NASDAQ:BNDX), Charles Schwab (NYSE:SCHW), and Fidelity MSCI Telecommunications Services (NYSE:FCOM) that have built solid platforms in the ETF world because of their commitment to offering the lowest costs possible for investors. This ensures consumers have access to a diversified mix of stocks or bonds with very little drag on performance versus the underlying benchmark.
The iShares brand is a perennial juggernaut in the ETF world that has been slower to trim fees on several of its flagship funds. This may be the result of index provider costs, operating costs, or a whole host of other factors. Furthermore, it may just be because the assets in the fund are sticky and they know investors will own it regardless of the expense ratio.
Nevertheless, it may be time for Blackrock (NYSE:BLK) to review these areas and consider making changes in light of competition and doing the right thing for their investors.
#1: iShares MSCI Emerging Markets ETF (ARCA:EEM)
EEM is the 12th largest U.S.-listed exchange-traded fund by asset size, with over $26 billion under management. This diversified international equity ETF sports an expense ratio of 0.68%, which is more than 4 times greater than the Vanguard FTSE Emerging Markets (ARCA:VWO) at 0.15%.
To put that in perspective, there isn’t a single ETF in the top 50 funds (by assets) with a greater expense ratio than EEM. Despite the fact that VWO and EEM track different indexes, they have shown remarkable correlation over the last 5 years. In fact, VWO is leading in total return over that time frame in part because of its lower fee structure.
It’s also worth noting that theiShares MSCI EAFE (ARCA:EFA)chares an expense ratio of 0.33%, which seems more in line with an appropriate point for EEM.
#2: iShares iBoxx $ High Yield Corporate Bond (ARCA:HYG)
Investors love high yield bonds, yet the 0.50% expense ratio on HYG seems quite excessive. This ETF has $13 billion dedicated to over 1,000 fixed-income securities of companies with below-investment grade credit quality.
The comparable SPDR Barclays (LONDON:BARC) High Yield Bond (ARCA:JNK) sports an expense ratio of 0.40%, which is 20% less than HYG. In addition, the iShares iBoxx $ Investment Grade Corporate Bond (ARCA:LQD) offers a miniscule expense ratio of just 0.15%. Tracking an index of junk bonds versus investment grade bonds doesn’t seem like it would warrant 3 times the cost.
My preference would be to see the expense ratio for HYG cut in half, which would put the fund at a distinct advantage over its competition.
#3:iShares US Real Estate (ARCA:IYR)
Here again we have a very similar situation as EEM, where Vanguard has significantly undercut its primary competition. IYR is the second largest U.S.-focused real estate ETF by assets, with over $4.3 billion dedicated to a diversified portfolio of 115 REITs. This fund charges an expense ratio of 0.45%, which is nearly 4 times greater than the 0.12% expense ratio of the Vanguard REIT (ARCA:VNQ).
Despite following slightly different indexes, both funds have shown a high degree of price correlation over the last half decade. Not surprisingly, Vanguard has been the overall winner in total return during that time frame.
My preference for IYR is that iShares attempt to price this at less than half of its current expense ratio. This would contribute to better overall performance and likely attract more assets as investors compare similar options.
The Bottom Line
Expense ratios aren’t the full story when comparing ETF costs. You must also take into account trading fees, bid/ask spread, index construction, and other market costs when analyzing similar products.
Many times a specific ETF will be chosen simply because it can be purchased commission free at your online broker. That may be an overriding factor, particularly if you are managing a small account that is just getting off the ground.
However, when obvious disparities exist and other barriers have been eliminated, it should be a priority to choose the fund with the lowest embedded expenses to enhance your returns over time.
My hope is that iShares will continue to review their fees on an annual basis and consider lowering investor costs whenever possible.
Disclosure : FMD Capital Management, its executives, and/or its clients may hold positions in the ETFs, mutual funds or any investment asset mentioned in this article. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities.