The cost of an exchange-traded fund refers not to the price at which it trades but to the expenses associated with buying and selling the fund; primarily, its expense ratio and the commission charged by a broker to place the trade.
The expense ratio is a yearly fee charged to a fund’s shareholders that is used to cover fund expenses, including administrative fees, management fees, operating costs and other fund costs. Because operating expenses are taken out of the fund’s assets, the return for investors is thereby reduced by the expense ratio percentage. These fees may not amount to much each year, but over time can have a significant and negative effect on longer-term returns.
If you are interested in a particular ETF but find its expense ratio to be prohibitively high, you may be able to find a less expensive alternative – an ETF that provides the same exposure, with a lower expense ratio. Here, we will look at three ETFs that offer access to gold, silver and the S&P 500 Index and a more affordable alternative to each.
Exposure to Gold
- GLD – 0.40 per cent
- IAU – 0.25 per cent
The popular SPDR Gold Shares ETF invests solely in physical gold , and the fund is one of the world’s largest holders of gold bullion with nearly $65-billion in assets. Launched on Nov. 18, 2004, GLD has a 0.40 per cent expense ratio and an average three-month volume of nearly 11 million.
The iShares COMEX Gold Trust is also designed to track the day-to-day price movement of gold bullion, and shares are backed by physical gold. IAU, however, has a more affordable expense ratio of 0.25 per cent. IAU was launched on Jan. 21, 2005, and has total net assets close to $11-billion and an average three-month volume of nearly 7 million.
Exposure to Silver
- SLV – 0.50 per cent
- SIVR – 0.30 per cent
The iShares Silver Trust ETF holds physical silver bullion and provides investors with exposure to the price of silver. Launched on April 21, 2006, SLV has net assets of almost $10-billion, an average three-month volume of more than 11 million and an expense ratio of 0.50 per cent.
Also offering exposure to physical silver is the ETFS Physical Silver Shares, a fund designed to replicate the price of silver bullion, with shares backed by physical silver held by a custodian. With an inception date of July 24, 2009, SIVR has a more affordable expense ratio of 0.30 per cent, total net assets of about $539.8-million and an average three-month volume of more than 200,000.
Exposure to the S&P 500
- SPY – 0.09 per cent
- VOO – 0.05 per cent
The S&P 500 is one of the most widely followed benchmarks and is comprised of large-cap U.S. equities. The SPDR S&P 500 ETF tracks the S&P 500 Index and is both the oldest, most actively traded, and largest ETF in the world with more than $122-billion in assets. Three-month average volume is well over 100 million. Launched on Jan. 29, 1993, SPY has an expense ratio of 0.09 per cent.
Vanguard’s S&P 500 ETF offers the same exposure to the S&P 500 Index, but has a lower, 0.05 per cent expense ratio. VOO was launched on Sept. 7, 2010, has nearly $8-billion in assets under management and has an average three-month volume of about 1.4 million.
The Bottom Line
Investors can save considerable money over time by finding ETF alternatives – products that offer the same exposure at a more affordable expense ratio. The funds listed here are examples to get you started. Web sites such as www.etfdb.com can be used to research more funds that offer the exposure you want for your portfolio.
Like expense ratios, commissions can add up over time. While online commissions typically cost under $10, higher commissions often apply for broker-assisted orders, automated phone orders and special order types. If you place one or two trades a year the commissions will not significantly alter your returns; however, if you are an active trader, commissions can become a valid concern. Today’s investors have access to a growing number of commission-free ETFs. For example, the Schwab OneSource ETF trading platform offers commission-free trading for the Physical Silver Shares ETF, listed here as an affordable alternative to the popular iShares Silver Trust.
While you should not make investing decisions based on costs alone, you may be able to find funds that meet your investing goals while offering lower costs. As with any investment, it is important to perform appropriate research before making any decisions.
Jean Folger is co-author of the award winning book Make Money Trading: How to Build a Winning Trading Business, and has written numerous articles appearing in Futures Magazine, Smart Trade Digest and other online venues. She is co-author of the eBooks Volatility Indicators: Techniques for Profiting from the Market's Moves; and High Profits in High Heels: Secrets from Today's Top Women Traders.
Jean is a system researcher for PowerZone Trading, LLC , a company she co-founded to develop commercial indicators and custom trading systems for the TradeStation and NinjaTrader platforms. Previously, Jean was a real estate broker and a high school English teacher. Jean can be reached at firstname.lastname@example.org.