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Exchange-Traded Funds First Cut ETFs

The Lowest-Cost Domestic Equity ETFs

Some ETFs have extremely low expense ratios and a lower cost gives a fund a relative advantage.

by Charles Rotblut | September 2020

Charles Rotblut leads a class in AAII's new Essential Investing Video Course. Go to https://www.aaii.com/ves for more information and to subscribe.


Exchange-traded funds (ETFs) are known for having low expense ratios, but some have extremely low expense ratios. This month’s ETF First Cut identifies 26 domestic equity ETFs charging 0.05% or less. A 0.05% expense ratio is equivalent to paying to $0.50 for every $1,000 invested.

ETFs classified as investing in large-cap stocks account for the overwhelming majority of the passing funds. This may be partially due to the reduced trading costs and higher demand for these types of stocks. Even those large blend funds targeting a broader range of stocks tend to hold market-capitalization-weighted portfolios, meaning large-cap stocks account for a larger portion of their portfolios. A handful of mid-cap and small-cap ETFs make the list as well.

Several of the passing ETFs have experienced good relative performance, as can be seen by their AAII grades (scale of A–F). Not all have. A grade of C next to the annualized return implies that the ETF’s performance is about average for its group. This is likely most attributable to the index that an ETF is designed to track relative to its peers. Nonetheless, all things being equal, a lower cost will give a fund a relative advantage.

The passing funds here have a minimum asset size of $100 million. ETFs smaller than this are at greater risk of being closed for failing to have achieved a significant size. The size requirement was not included in the full screen results; this list, updated monthly, is available to A+ Investor subscribers at First Cut Screens in the ETFs section of AAII.com. ▪

Discussion

STEVEN H from IN posted over 5 years ago:

Any thoughts about the relative value in using something like the SPY with an expense ratio of 0.09 versus the VOO with an expense ratio of 0.03. The SPY has much more liquidity (~25x daily volume) and likely better fills. Also, if you wanted to write covered calls, the bid/ask would be much closer on the SPY. If you have a longer term outlook and plan to just hold them for years, the lower expense ratio might be the better choice.


BARRY E from CA posted over 5 years ago:

Every study ever done indicates that the more you trade, the worse you do. So, by all means, take the .09 expense ratio over the .03 to cut your losses by .06% when you write calls to pick up a 1% to 2% call and give up 10% in appreciation and dividends. When you write covered calls you sell your winners and let your losers run; a hard learned lesson.


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