Is it better for an ETF to have a high or low expense ratio?
For example, Equity ETFs averaged 0.16% in 2021, down from 0.34% in 2009. Expense ratios of bond index ETFs averaged 0.12% in 2021, down from 0.26% in 2013. When evaluating ETFs, the lowest expense ratios are almost always preferred because many ETFs passively track the performance of an underlying benchmark.
Exchange-traded funds (ETFs) that are passively managed and track an index, such as the S&P 500, generally have the lowest expense ratios. This is because there is no additional research required or an increased level of buying and selling securities, simply because the funds track an index.
“The best expense ratio is the lowest expense ratio,” Arnold says. It's important to compare a fund's expense ratio with similar offerings so you don't overpay for your fund's management services. In general, an expense ratio over 1% may be too high for the average investor.
| Symbol | Name | Expense Ratio |
|---|---|---|
| BDRY | Breakwave Dry Bulk Shipping ETF | 3.50% |
| HDGE | AdvisorShares Ranger Equity Bear ETF | 3.45% |
| FCEF | First Trust Income Opportunities ETF | 3.29% |
| HYIN | WisdomTree Alternative Income Fund | 3.19% |
| Symbol | Name | Expense Ratio |
|---|---|---|
| SPLG | SPDR Portfolio S&P 500 ETF | 0.02% |
| BBUS | JPMorgan BetaBuilders U.S. Equity ETF | 0.02% |
| BND | Vanguard Total Bond Market ETF | 0.03% |
| AGG | iShares Core U.S. Aggregate Bond ETF | 0.03% |
A good rule of thumb is to not invest in any fund with an expense ratio higher than 1% since many ETFs have expense ratios that are much lower. Also, ETFs tend to be passively managed, which keeps the management fee low.
A fund with a high expense ratio could cost you 10 times – maybe more – what you might otherwise pay. Typically, any expense ratio higher than one percent is high and should be avoided. Over an investing career, a low expense ratio could easily save you tens of thousands of dollars, if not more.
Buy and sell: *Vanguard average ETF and mutual fund expense ratio: 0.08%. Industry average ETF and mutual fund expense ratio: 0.47%.
An expense ratio reflects how much a mutual fund or an ETF (exchange-traded fund) pays for portfolio management, administration, marketing, and distribution, among other expenses. You'll almost always see it expressed as a percentage of the fund's average net assets (instead of a flat dollar amount).
| ETF | Assets Under Management | Expense Ratio |
|---|---|---|
| Vanguard Information Technology ETF (VGT) | $70 billion | 0.10% |
| VanEck Semiconductor ETF (SMH) | $16.3 billion | 0.35% |
| Invesco S&P MidCap Momentum ETF (XMMO) | $1.6 billion | 0.34% |
| SPDR S&P Homebuilders ETF (XHB) | $1.8 billion | 0.35% |
Which ETF has the best 10 year return?
| Symbol | ETF Name | 10y Chg 4-2-24 |
|---|---|---|
| PSI | Invesco Semiconductors ETF | 786% |
| META | Roundhill Ball Metaverse ETF | 717% |
| XSD | SPDR S&P Semiconductor ETF | 617% |
| XLK | SPDR Technology Sector ETF | 558% |
Market risk
The single biggest risk in ETFs is market risk. Like a mutual fund or a closed-end fund, ETFs are only an investment vehicle—a wrapper for their underlying investment. So if you buy an S&P 500 ETF and the S&P 500 goes down 50%, nothing about how cheap, tax efficient, or transparent an ETF is will help you.
Vanguard's unique cost structure, the economies of scale it has achieved, and the total number of assets under management (AUM) allow it to offer its ETFs at the lowest cost available in the market. We've listed 10 of the firm's cheapest ETFs by their expense ratio.
| Fund (ticker) | YTD performance | 5-year performance |
|---|---|---|
| SPDR Gold Shares (GLD) | 7.6 percent | 11.0 percent |
| iShares Silver Trust (SLV) | 4.5 percent | 9.9 percent |
| United States Oil Fund LP (USO) | 18.1 percent | -4.7 percent |
| Invesco DB Agriculture Fund (DBA) | 19.4 percent | 9.9 percent |
Vanguard S&P 500 ETF holds a Zacks ETF Rank of 2 (Buy), which is based on expected asset class return, expense ratio, and momentum, among other factors. Because of this, VOO is a great option for investors seeking exposure to the Style Box - Large Cap Blend segment of the market.
The administrative costs of managing ETFs are commonly lower than those for mutual funds. ETFs keep their administrative and operational expenses down through market-based trading. Because ETFs are bought and sold on the open market, the sale of shares from one investor to another does not affect the fund.
VTI is a total U.S. market fund and holds more than 3,500 stocks. VTI is better diversified and benefits from small and mid-cap stocks that grow into large caps. VOO is less diversified, tracking the performance of the S&P 500 Index. VOO excludes small and mid-cap stocks.
Evaluate the ETF's Premium or Discount
If the ETF is trading at a premium, it could indicate that the ETF is overvalued. If it's trading at a discount, it could indicate that the ETF is undervalued.
Expense ratios. VOO and IVV boast the lowest management fee at 0.03%, about one-third of the SPY ETF. While the difference between a 0.03%, and 0.0945% expense ratio may seem trivial, such fees can really add up. For every $10,000 invested, these respective fees equal $3 and $9.45 annually.
VOO charges 0.03%, while SPY charges 0.09%. With all else equal, the fund with the lower fee is more aligned with investors' best interests.
What is the best dividend ETF?
- Broadcom (1.53% dividend yield)
- JPMorgan Chase (2.36%)
- ExxonMobil (3.13%)
- Johnson & Johnson (3.20%)
- Home Depot (2.58%)
- Procter & Gamble (2.58%)
- Merck (2.44%)
- AbbVie (3.70%)
The Invesco QQQ Trust is a relatively inexpensive fund, given its 0.2% ETF expense ratio. However, the stocks in the fund are rather expensive.
VGT - Performance Comparison. In the year-to-date period, QQQ achieves a 7.16% return, which is significantly higher than VGT's 6.59% return. Over the past 10 years, QQQ has underperformed VGT with an annualized return of 18.84%, while VGT has yielded a comparatively higher 20.54% annualized return.
Net Expense Ratio 0.95%
To keep costs low, Vanguard often uses a sampling strategy to construct its index funds using less than the total number of assets in an index. Vanguard offers funds that track a wide variety of market indices, large and small.
