How ETF Investors Can Save $415 Million (Without Breaking A Sweat)

by on November 15, 2011 | ETFs Mentioned:

Financial advisors and individual investors who have embraced ETFs are generally painted as a cost conscious crowd, passing over expensive active mutual funds in favor of cheap indexing strategies. In general ETFs are considerably cheaper than mutual funds, thanks not only to the indexing strategy but also to the more efficient exchange-traded structure.

But not all ETFs and ETNs are equally tax efficient; in many cases, the differential between products offering similar exposure can be meaningful. In fact, there are several examples of products linked to identical indexes with wildly different expense structures. And while there has been a movement towards cheaper products, a number of more expensive ETFs remain tremendously popular. So much so that movements from a handful of funds to lower cost alternatives could result in aggregate annual savings of more than $400 million in management fees–without altering the underlying index [see 25 Things Every Financial Advisor Should Know About ETFs] .

Consider these examples: (all tables use AUM figures as of October 31, 2011 from and expense ratios as of November 7, 2011):

Emerging Markets ETFs

Emerging markets have been best performers in many investor portfolios over the last several years, climbing higher as developed markets struggled to gain traction and reclaim ground lost during the recent recession. ETFs have become a popular tool for accessing emerging markets, and investors have gravitated towards a pair of products linked to the MSCI Emerging Markets Index in particular; iShares’ EEM and Vanguard’s VWO have about $80 billion in aggregate assets.

While the index might be the same, the fee differential is significant; EEM costs more than three times what VWO does. That translates into additional fees of about $165 million annually that are paid for exposure to emerging economies:

Ticker ETF ER AUM ($ mils) “Excess” Fees
EEM MSCI Emerging Index Fund 0.69% $35,082 $164.98 M
VWO Emerging Markets ETF 0.22% $46,291 n/a
Total $81,373 $164.89 M


Another staple of the international equity portion of portfolios is the EAFE region, which essentially includes developed markets outside of North America. Once again, the two most popular options for this type of exposure are funds from iShares and Vanguard. And once again, these ETFs are linked to the same index with the Vanguard option claiming a meaningful edge in expenses.

Both EFA and VEA seek to replicate the MSCI EAFE Index; those with positions in EFA could save more than $85 million annually by switching to the more cost efficient VEA:

Ticker ETF ER AUM ($ mils) “Excess” Fees
EFA MSCI EAFE Index Fund 0.35% $38,136 $87.71 M
VEA Europe Pacific ETF 0.12% $6,736 n/a
Total $44,872 $87.71 M

S&P 500 ETFs

The S&P Index is perhaps the most widely-followed stock benchmark in the world, and investors seeking exposure have three different ETFs to choose from [see Beyond SPY: Nine Alternatives To S&P 500 ETFs]. Though the differential in fees between the various options is minor at just three basis points, the sheer size of the AUM base linked to the S&P 500 results in some significant potential savings if investors were to move assets in SPY and IVV to VOO:

Ticker ETF ER AUM ($ mils) “Excess” Fees
SPY SPDR S&P 500 ETF 0.09% $90,880 $27.26 M
IVV S&P 500 Index Fund 0.09% $27,421 $8.23 M
VOO S&P 500 ETF 0.06% $1,874 n/a
Total $120,175 $35.49 M

Aggregate U.S. Bond ETFs

The Barclays Capital U.S. Aggregate Bond Index has the distinction of being the most replicated benchmark in the ETF industry; four separate products offer exposure to this measure of investment grade securities from U.S. issuers. While all linked to the same index, these four ETFs–offered by iShares, Vanguard, State Street, and Schwab–are far from identical. For starters, they all use different sampling strategies; the number of individual bonds held is quite different. And the expenses are not identical either; investors could save about $18 million annually if they moved from AGG, BND, and LAG into SCHZ, which charges just 10 basis points (and can be traded commission free in Schwab accounts) [see our Better-Than-AGG Total Bond Market ETFdb Portfolio].

Ticker ETF ER AUM ($ mils) “Excess” Fees
 AGG Barclays Aggregate Bond Fund  0.22%  $13,785  $16.54 M
 BND Total Bond Market ETF Profile  0.11%  $12,868  $1.29 M
 LAG SPDR Barclays Aggregate Bond ETF  0.17%  $284  $0.20 M
 SCHZ U.S. Aggregate Bond ETF  0.10%  $113 n/a
Total  $27,050  $18.03 M

Gold ETFs

Gold has also become a tremendously popular investment destination in recent years, and ETFs have become the vehicle of choice for all types of investors seeking access to precious metals. Historically, the Gold SPDR (GLD) has been the default choice for exposure to physical gold, but a competitor have been gaining ground in recent months thanks in part to a more favorable fee structure [see Special Report August 2011: Gold ETFs In Focus].

The iShares COMEX Gold Trust is similar to GLD in that it holds physical gold, but different in that it charges only 0.25% in annual fees (compared to 0.40% for GLD). That means that investors could save a little more than $100 million annually by switching to IAU:

Ticker ETF ER AUM ($ mils) “Excess” Fees
 GLD  SPDR Gold Trust  0.40%  $68,825  $103.24 M
 IAU  COMEX Gold Trust  0.25%  $9,156 n/a
Total  $77,981  $103.24 M

Commodity ETFs

Investors looking to add commodity exposure to their portfolios are increasingly turning towards exchange-traded products–specifically ETNs. One of the most popular broad-based commodity ETPs is the iPath Dow Jones UBS Commodity Index ETN (DJP), which has about $2.5 billion in assets [see Special Report September 2011: In Search Of The Best Commodity ETF].

Most of the investors with assets in DJP apparently aren’t aware that UBS offers an ETN linked to the exact same benchmark with a considerably lower fee; DJCI charges just 0.50% compared to 0.75% for the iPath product. The potential savings here aren’t as enormous as in some other cases–only about $6 million–but significant nevertheless.

Ticker ETF ER AUM ($ mils) “Excess” Fees
 DJP  Dow Jones-UBS Commodity Index TR ETN  0.75%  $2,575  $6.44 M
 DJCI  DJ-UBS Commodity Index Total Return ETN  0.50%  $23  n/a
Total  $2,598  $6.44 M

Disclosure: Long IVV.