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Falling Fees Aren't All Sunshine and Roses for the Average Investor

Apr 12, 2019

Better Data for Better Investment DecisionsBetter Data for Better Investment Decisions
Better Data for Better Investment DecisionsBetter Data for Better Investment Decisions

 

  • Mutual funds and exchange-traded funds (ETFs) have been battling to offer the best, lowest fees to investors, but according to the New York Times, not all investors know how to properly handle investing in this environment.  
     
  • It should not be a surprise to hear of the “Fee War” that has raged on for years within the investment management industry. Since the mainstream adoption of low-cost ETFs, which are portfolios of stocks that traded intraday on an exchange, investment management companies have dealt exchanging blows to bring fees closer and closer to zero. Of late, this battle has ramped up in intensity.
     
  • Vanguard Group, the second-largest global provider of ETFs by assets under management (AUM), disclosed in a February filing that it plans to reduce fees on 10 of its funds with combined AUM of $176 billion.
     
  • Shortly after, online lender SoFi announced they planned to begin offering zero-fee ETFs.  
     
  • Charles Schwab and Fidelity have also announced recently that they plan to increase the number of ETFs clients can trade without paying commission.  
     
  • JPMorgan Chase just cut the expense ratio for one of its US stock funds to just 0.2%! 
     
  • Most recently, State Street Global Advisors, Defiance, BlackRock, and DWS announced they would launch low-fee funds.
     
  • At first glance, low-cost ETFs sound amazing for the investor, and for the most part, they are. But, there are some caveats that all investors should pay attention to and avoid.
     
  • Investors with access to low-cost ETFs often buy and sell the financial instruments in too much frequency. Just because you can trade an ETF every day does not mean you should! 
     
  • ETFs with expense ratios less than 0.2% hold nearly 75% of total ETF industry AUM. The concentrated holdings among so few ETFs may pose all kinds of risks to investors.  
     
  • Investors misinterpret that ETFs with low fees are automatically good ETFs! The holdings of some low-fee ETFs can often be more narrow in focus, which does not necessarily suitable for all portfolios. It is so important to understand an ETF’s holdings and investment style before buying.  
     
  • Finally, investors should make sure they pay attention to the liquidity of an ETF they are considering buying. By looking at an ETF’s bid/ask spread, investors can determine how liquid an ETF is -- a narrower bid/ask spread indicates a liquid ETF while a wider bid/ask spread indicates an illiquid ETF.
     
  • Despite some negatives of low-fee ETFs, the development in the investment management industry is beneficial overall. Using ETFs, investors can build efficient, low-cost portfolios that are diversified across asset classes, sectors, and geographic regions.
     
  • The Bogleheads, which are a group of investment enthusiasts that praise Vanguard Group founder John C. Bogle, recommend a three-ETF portfolio that tracks the broad US stock market, international stock markets, and domestic investment-grade investment bonds. 
     
  • Investment guru Warren Buffett, meanwhile, suggests an even simpler approach. Buffet recommends investors’ portfolios hold just two evenly-allocated ETFs; one low-cost ETF that tracks the S&P 500 and one low-cost ETF that holds short-term government bonds.
     
  • Using our popular ETF AI Portfolios, investors can build efficient, low-cost, and diversified portfolios . We offer several different models that depend on an investors' objectives! Check them out here.

 

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Global Top Stock IdeasTOP LONG & TOP SHORT STOCK IDEAS FOR GLOBAL MARKETSMONTHLY TOP IDEAS FROM OUR MULTI-FACTOR QUANTITATIVE MODELS