ETFs have seen explosive growth, in part due to lower overall costs and with some assistance from active managers underperforming for a number of years.
Now, don’t get me wrong – low fees are great for investors, particularly long term (which most, if not all, investors should be).
However, in some cases, fees have become the only thing analyzed. When, in reality, there are many considerations beyond simply analyzing the stated expense ratio, including tradability and tracking, access, and exposure.
The ability to trade an ETF, and the ability for an ETF to accurately track its underlying index are huge – and often forgotten – elements to ETF investment. Looking at the ETF universe, on an equally-weighted basis the average bid-ask spread is a whopping 0.90%, and on an asset-weighted basis a reasonable 0.07%. Without proper trading, investors could effectively double their expense ratios just by purchasing the product!