5 Low-Fee ETFs That Aren’t All That Great

| November 14, 2018 | 0 Comments
low-fee ETFs

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Not all low-cost ETFs are great. Some have higher-fee competitors that are better.

There is no doubt about it: when it comes to exchange-traded funds (ETFs), advisors and investors love the low-fee products. For several years, the top funds in terms of new assets added are low-fee ETFs. That trend is continuing in 2018.

Of the top 10 asset-gathering ETFs on a year-to-date basis, all have annual fees of 0.2% or less. The most expensive member of that group is the iShares Floating Rate Bond ETF (BATS:FLOT), which charges 0.2% per year, or $20 on a $10,000 investment.

Whether it is buying a low-fee ETF, car, television or another everyday item, investors and shoppers like the perception of value or “getting a good deal.” And yes, fees certainly matter on funds, particularly for long-term investors. The math is simple. The lower the fee, the better a fund’s returns are over long holding periods.

Still, not all low-fee ETFs are ideal. In a universe of over 2,200 U.S.-listed exchange traded products, there are plenty of examples of where low-fee ETFs are not the best options because there are comparable, pricier products delivering better returns. Here are some low-fee ETFs that leave something to be desired.

Vanguard Dividend Appreciation ETF (VIG)

Expense Ratio: 0.08%

There are at least two obvious reasons why investors have made the Vanguard Dividend Appreciation ETF (NYSEARCA:VIG) the largest U.S. dividend ETF: the low fee and VIG’s requirement that member firms have dividend increase streaks of at least 10 years.

Sure, this low-fee ETF comes with an expense ratio that makes it 92% cheaper than the average expense ratio of similar funds of competing strategies, but that does not mean VIG is the best dividend ETF on the market. It merely means it is one of the cheapest.

Several well-known dividend growth ETFs have, over various time frames, outperformed VIG despite having higher fees. The WisdomTree U.S. LargeCap Dividend Fund (NYSEARCA:DLN) is a prime example. Since the start of the current bull market in U.S. stocks in March 2009, DLN has, including paid dividends, returned 345.2% compared to 306% for VIG, rendering the fact DLN costs 20 basis points more per year a moot point. Annualized volatility for the two funds over that period was also comparable.

iShares Edge MSCI USA Momentum Factor ETF (MTUM)

Expense Ratio: 0.15%

Let’s be clear regarding the inclusion of the iShares Edge MSCI USA Momentum Factor ETF (CBOE:MTUM) on this list: this more about timing and the recent erosion experienced by momentum stocks than it is a comment on MTUM being a “bad” low-cost ETF. MTUM is not a bad fund.

Owning this low-fee ETF, like so many other things in life, is about timing. Single-factor strategies work until they don’t, but repudiation of the momentum factor can be severe. That much was on display in October, when MTUM’s monthly loss was 310 basis points greater than the S&P 500’s.

MTUM is a great low-fee ETF when stocks like Amazon (NASDAQ:AMZN) and Netflix (NASDAQ:NFLX) are rallying, but when those names falter in unison, momentum funds, regardless of fees, will be punished.

Schwab U.S. Large-Cap Value ETF (SCHV)

Expense Ratio: 0.04%

Among single-factor funds, low-cost ETFs with exposure to value stocks are some of the most popular products. That includes the Schwab U.S. Large-Cap Value ETF (NYSEARCA:SCHV), which is one of the least expensive value funds on the market.

As is the case with the aforementioned MTUM, SCHV is not necessarily a bad low-fee ETF. The fund has $4.6 billion in assets under management and garners four-star ratings from Morningstar. Still, there are potentially better options to consider among low-fee funds with value tilts.

The  iShares Edge MSCI USA Value Factor ETF (BATS:VLUE) charges just 0.15% per year and has outpaced SCHV by 360 basis points over the past three years. VLUE allocates 26% of its weight to technology stocks, more than double SCHV’s weight to that sector.

Vanguard Small-Cap ETF (VB)

Expense Ratio: 0.05%

The Vanguard Small-Cap ETF (NYSEARCA:VB) is a giant among low-fee ETFs featuring exposure to small-cap stocks. VB checks many of the boxes investors look for with broad market, low-cost funds. The fund is highly liquid, can be traded commission-free on several platforms — including with Vanguard — and holds a large number of stocks (over 1,400).

The strike against VB is just how much of a small-cap fund it really is. VB’s components have a median market value of $4.2 billion, or more than double the $2 billion that is the top end of small-cap territory.

The iShares Core S&P Small-Cap ETF (NYSEARCA:IJR) is a low-cost ETF that tracks the widely followed S&P SmallCap 600 Index. The median market value of components in that index is $1.15 billion, indicating the size factor is behind much of IJR’s out-performance of VB over the past three years.

iShares National Muni Bond ETF (MUB)

Expense Ratio: 0.07%

For investors looking for broad-based, cost-effective municipal bond exposure, the iShares National Muni Bond ETF (NYSEARCA:MUB) is certainly a credible option. MUB tracks the S&P National AMT-Free Municipal Bond Index, holds 3,400 municipal bonds and is one of the least-expensive funds in this category.

For just two basis points more per year, the Vanguard Tax-Exempt Bond ETF (NASDAQ:VTEB) is a credible alternative to MUB. VTEB holds nearly 800 more bonds than MUB, and the low-cost ETF from Vanguard has an effective duration of 5.8 years compared to 6.2 years on the rival MUB.

VTEB is the first municipal bond ETF in Vanguard’s lineup.

Todd Shriber does not own any of the aforementioned securities.


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