DIY Investor Magazine
/
December 2015
45
Vanguard FTSE 100 ETF to 0.48% for the iShares MSCI
UK Large Cap ETF.
Don’t stop there, however. Industry experts will tell you
that a total expense ratio – or TER – does not cover the
full cost.
‘Far more important is the tracking of the fund versus
the index,’ said Michael John Lytle, chief development
officer at Source. ‘Paying a low fee can become
relatively irrelevant if the fund is under-performing.’
The key measure is what’s known as ‘tracking
difference,’ which compares the return of the fund and
the return of its index over a one-year time period.
Looking at the same pool of twenty four large cap UK
equity ETFs shows the power of this statistic.
Recorded on a cumulative annual basis in Euros, the
UBS FTSE 100 ETF and iShares FTSE 100 trailed their
indexes by only 0.01%, yet this jumps to 0.29% for the
Source FTSE 100 ETF and 0.31% on the ComStage
FTSE 100 TR ETF.
CONSIDER TRADING COSTS
Finally, remember to consider trading costs. Unlike
mutual funds, you must pay both a commission and a
spread when buying an ETF, just like when you buy a
stock.
The wider the spread – the difference between the bid
and the ask – the more it costs you to buy.
These costs can be prohibitive, and can easily
overwhelm small differences in expenses.
So choose carefully.
Used properly, ETFs can be enormously valuable
tools, offering you institutional-quality exposures at
extraordinarily low prices. But with 1,300+ choices, it
pays to take five minutes and dig a little deeper to find
the best fund to meet your needs.
FXI OWNS MOSTLY LARGE, GOVERNMENT-OWNED FINANCIAL
AND ENERGY COMPANIES, WITH ESTABLISHED BUSINESS
LINES AND DEFENSIBLE PROFITS.
