Inside The Five Most Expensive ETFs

by on March 17, 2010

The rise of the ETF industry is often attributed (in large part at least) to a shift in investor preference from pricey active management to low-cost indexing strategies. ETFs burst on to the investment scene by offering fees equivalent to only a fraction of those charged by traditional actively-managed mutual funds, and have continued to attract assets as investors frustrated with the inability of active management to consistently generate alpha seek out more cost-efficient alternatives.

But not all ETFs offer bargain basement expense ratios. As the product offerings have become increasingly specialized and targeted in recent years, average fees have been on the rise. This trend isn’t necessarily attributable to issuer greed (the low end of the expense ratio range has expanded as well), but rather to increasing complexity and granularity of exposure available through ETFs. Replicating the S&P 500 is a relatively simple task, but tracking the performance of more complex strategies or far-flung markets often incurs additional costs. There are now a handful of ETFs that have seen expense ratios climb above the 1% mark, venturing into mutual fund territory. Below, we highlight five ETFs that charge an expense ratio of at least 1.0%.

5. Market Vectors Gulf States Index ETF (MES): Expense Ratio = 1.0%

This ETF tracks the Dow Jones GCC Titans 40 Index, a modified cap-weighted index that tracks the performance of equity markets in the Gulf States. With major allocations to Kuwait (41%), the UAE (27%), and Qatar (22%), this fund offers exposure to a basket of securities most investors would have difficulty accessing otherwise.

4. IndexIQ Hedge Macro Tracker ETF (MCRO): Expense Ratio = 1.10%*

MCRO is designed to replicate the performance of the IQ Hedge Macro Index, a benchmark that replicates the risk-adjusted return characteristics of a combination of hedge funds pursuing a macro strategy and hedge funds pursuing an emerging markets strategy.

Like other hedge fund replication ETFs from IndexIQ, MCRO is an “ETF of ETFs,” meaning that its underlying holdings are not stocks and bonds but rather other ETFs. While this strategy is an efficient way to pursue complex strategies that include exposure to multiple asset classes, it also has the potential to increase expenses by creating multiple levels of costs. MCRO charges an expense ratio of 75 basis points, but the acquired fund fees and expenses from MCRO’s underlying holdings add another 35 basis points, resulting in an effective expense ratio of 1.10%. A big reason for MCRO’s sizeable acquired funds expense is the 20% allocation to EEM, which charges 72 basis points.

3. S&P GSCI Enhanced Commodity Total Return ETN (GSC): Expense Ratio = 1.25%

Exchange-traded commodity products tend to be on the expensive side, but this product from Goldman Sachs is expensive even for natural resource exposure. GSC is linked to the S&P GSCI Enhanced Commodity Total Return Strategy Index, a benchmark that serves as a composite of commodity sector returns representing an unleveraged, long-only investment in a diversified basket of commodity futures. This ETN charges 1.25% in expenses, significantly higher than other diversified commodity products. DJCI, for example, charges an expense ratio of just 0.50%.

2. Dent Tactical ETF (DENT): Expense Ratio = 1.56%

This ETF from AdvisorShares is one of the early entrants in the active ETF race. DENT doesn’t track the performance of any benchmark, rather it seeks to deliver long-term growth of capital by identifying, through proprietary economic and demographic analysis, the overall trend of the U.S. and global economies and how consumer spending patterns may change.

Similar to MCRO, DENT is an ETF of ETFs, currently maintaining ten approximately equal positions in sector-specific and broad-based funds from various ETF issuers. DENT charges a management fee of 95 basis points, but 44 basis points in additional fees and another 17 in acquired fund expenses brings the total cost to 1.56%.

1. PowerShares CEF Income Composite Portfolio (PCEF): Expense Ratio = 1.81%*

This ETF is based on the S-Network Composite Closed-End Fund Index, which tracks the performance of closed-end funds that invest in investment grade fixed income securities and high yield fixed income securities, as well as those that utilize an equity option writing strategy. PCEF charges an expense ratio of just 50 basis points, but acquired fund fees and expenses of 1.31% results in an “all-in” expense ratio of 1.81%.

This expense ratio hasn’t deterred many investors; PCEF has accumulated nearly $40 million in assets less than a month after its launch.

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Disclosure: No positions at time of writing.