ETFdb Logo
ETFdb Logo
  • ETF Database
  • Channels
    • Themes
      • Active ETF
      • Artificial Intelligence
      • Beyond Basic Beta
      • China Insights
      • Climate Insights
      • Core Strategies
      • Crypto
      • Direct Indexing
      • Disruptive Technology
      • Energy Infrastructure
      • ETF Building Blocks
      • ETF Investing
      • ETF Education
      • ETF Strategist
      • Financial Literacy
      • Fixed Income
      • Free Cash Flow
      • Innovative ETFs
      • Institutional Income Strategies
      • Leveraged & Inverse
      • Managed Futures
      • Market Insights
      • Modern Alpha
      • Multifactor
      • Responsible Investing
      • Retirement Income
      • Tax Efficient Income
    • Asset Class
      • Equity
        • U.S. Equity
        • Int'l Developed
        • Emerging Market Equities
      • Alternatives
        • Commodities
        • Gold/Silver/Critical Minerals
        • Currency
        • Volatility
      • Fixed Income
        • Investment Grade Corporates
        • US Treasuries & TIPS
        • High Yield Corporates
        • Int'l Fixed Income
    • ETF Ecosystem
    • ETFs in Canada
  • Tools
    • ETF Screener
    • ETF Country Exposure Tool
    • ETF Sector Tracker Tool
    • ETF Database Categories
    • Head-To-Head ETF Comparison Tool
    • ETF Stock Exposure Tool
    • ETF Issuer Fund Flows
    • Indexes
    • Mutual Fund To ETF Converter
  • Research
    • ETF Education
    • Equity Investing
    • Dividend ETFs
    • Leveraged ETFs
    • Inverse ETFs
    • Index Education
    • Index Insights
    • Top ETF Sectors
    • Top ETF Issuers
    • Top ETF Industries
  • Webcasts
  • Themes
    • AI ETFs
    • Blockchain ETFs
    • See all Thematic Investing ETF themes
    • ESG Investing
    • Marijuana ETFs
  • Multimedia
    • ETF 360 Video Series
    • ETF of the Week Podcast
    • ETF Prime Podcast
    • Video
  • Company
    • About VettaFi
    • Get VettaFi’ed
  • PRO
    • Pro Content
    • Pro Tools
    • Advanced
    • FAQ
    • Pricing
    • Free Sign Up
    • Login
  1. Fixed Income Channel
  2. An ETF’s Expense Ratio Matters More Than Its Spread
Fixed Income Channel
Share

An ETF’s Expense Ratio Matters More Than Its Spread

James ComtoisJun 22, 2023
2023-06-22

An ETF’s spread is the difference between the price at which investors can buy the fund on the exchange and the price at which it can’t be sold. For sure, an ETF’s spread is important, especially for shorter holding periods. But when does its expense ratio become more significant? According to new research from Vanguard, it could be sooner than one may think.

Tallying the total cost of ownership for an ETF may seem as simple as adding its expense ratio and spread. But it’s actually a bit more complicated than that. That’s because this doesn’t consider the critical component of time. The longer the holding period, the more an ETF’s expense ratio becomes a deciding factor.

See more: Don’t Expect Rates to Go Down Just Yet

VCIT vs. LQD: A Case Study

To demonstrate this, Vanguard compares the Vanguard Intermediate-Term Corporate Bond ETF (VCIT A) and the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD A). VCIT includes intermediate-term bonds between 5 and 10 years of maturity. Meanwhile, LQD includes bonds all along the corporate bond yield curve (with a tilt towards more liquid bonds).

Despite their differences, these funds are similar in terms of risk with both having intermediate durations.

All told, it took 13 trading days for VCIT’s lower expense ratio to make up for the spread difference. The difference in the funds’ expense ratios — VCIT’s 4 basis points vs. LQD’s 14 — offset LQD’s slight spread advantage (0.90 bp vs. VCIT’s 1.24 bps).


Content continues below advertisement

An ETF’s Expense Ratio Matters More Than Its Spread
Source: Bloomberg, From January 1, 2022, to December 31, 2022.

According to Vanguard: “the longer the holding period of VCIT, the lower expense ratio will enable your clients to maximize returns by minimizing costs.”

An investor holding $100,000 worth of VCIT for a year before selling would incur a total cost of ownership of $52.41. Meanwhile, holding $100,000 of LQD for a year before selling would cost an investor $148.96.

VettaFi’s vice chairman Tom Lydon called Vanguard “the Hoover of the ETF industry” for how it’s vacuumed up investor dollars.

“They are just rock solid,” Lydon said. “They’re low-cost and always very, very dependable.”

For more news, information, and analysis, visit the Fixed Income Channel.

Loading Articles...
Our Sites
  • VettaFi
  • Advisor Perspectives
  • ETF Trends
Tools
  • ETF Screener
  • Mutual Fund to ETF Converter
  • Head-To-Head ETF Comparison
  • ETF Country Exposure Tool
  • ETF Stock Exposure Tool
  • ETF Database Pro
More Tools
  • Financial Advisor & RIA Center
Explore ETFs
  • ETF News
  • ETF Category Reports
  • Premium Articles
  • Alphabetical Listing of ETFs
  • Browse ETFs by ETF Database Category
  • Browse ETFs by Index
  • Browse ETFs by Issuer
  • Compare ETFs
Information
  • Contact Us
  • Terms of Use and Privacy Policy
  • © 2023 VettaFi LLC. All rights reserved.

Advertisement

Is Your Portfolio Positioned With Enough Global Exposure?

ETF Education Channel

How to Allocate Commodities in Portfolios

Tom LydonApr 26, 2022
2022-04-26

A long-running debate in asset allocation circles is how much of a portfolio an investor should...

Core Strategies Channel

Why ETFs Experience Limit Up/Down Protections

Karrie GordonMay 13, 2022
2022-05-13

In a digital age where information moves in milliseconds and millions of participants can transact...

}
X