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YOU MIGHT ASK, “What makes an exchange-traded fund the best?” While it’s hard to say for sure which are the right funds to own, it’s often easy to spot a fund that should be tossed to the curb.
Take the iShares suite of exchange-traded index funds (ETFs). Did you know iShares offers two nearly identical emerging markets funds, iShares MSCI Emerging Markets ETF (symbol: EEM) and iShares Core MSCI Emerging Markets ETF (IEMG)? The only material difference is what you pay. EEM’s expense ratio is 0.7%, or 70 cents a year for every $100 invested, while IEMG’s expense ratio is a tiny 0.11%.
IEMG’s net assets are larger than EEM’s, as they should be, but investors are still collectively doling out tens of millions of dollars in excess fees by owning EEM instead of the less-expensive IEMG.
The 0.59 percentage point difference might not sound huge, but consider the impact on investment compounding. If you invested $10,000 today in IEMG instead of EEM, you’d save more than $11,000 over the course of 30 years, assuming a 7% annual pre-cost return.
A similar, though less drastic, expense gap exists between iShares MSCI EAFE ETF (EFA) and iShares Core MSCI EAFE ETF (symbol: IEFA). The difference in their expense ratios is only 0.25 percentage point.
As you check on your investments around year-end, be sure to review fund costs. You might be able to save yourself more than a few bucks by swapping to a lower-cost alternative. But be warned: If you make the swap in a regular taxable account, you might trigger a large capital-gains tax bill. That, presumably, is why almost $29 billion still languishes in iShares MSCI Emerging Markets ETF paying 0.7% a year.
One final point: Vanguard Group has received a lot of criticism in recent years, especially for its customer service, and deservedly so. Still, it’s hard to imagine Vanguard treating shareholders of one or two funds so inequitably. BlackRock, manager of the iShares ETFs, clearly has no such scruples.
I’ve long thought the ultra-cheap funds of Vanguard, Fidelity, Schwab and the like would eventually doom all higher cost funds. How completely wrong I’ve been. Of course, we could all have benefitted from these high fees by buying BlackRock stock which is up 29% in the last year – slightly edging out the S&P 500.
Thank you for this article. Just looked at iShares site factsheets for EFA and IEFA, and the expense ratio difference is .31….After the first of the new year I will be switching. Unfortunately, there is no less expensive version of EFV. I am also going to look at other fund managers to see what they have in this category. This is a good example of the fact that despite being a buy and hold investor, you can’t just buy and forget….
Thank you. The iShares site indeed shows a 0.25% fee difference. You are correct that an investor should always keep an eye on the fees they pay and not to just forget about it.
I’ll browse another site to see what investment firms are purchasing/adding on a quarterly basis and the ETFs they hold are the higher expense ratios.
Besides fees, the Authorized Participants make money by arbing the market price to the NAV. Nobody knows how much money this is, but it is money that the fund investors don’t receive.