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There's a fee war going on in the exchange-trade fund world and it's fabulous news for investors.

But let's get something straight about ETF investing – low fees aren't everything. OK, they're 90 per cent of everything. The remaining 10 per cent is accounted for by such things as the makeup of the index being tracked, tracking error, liquidity, diversification and tax treatment of distributions, if applicable.

The drive to lower ETF fees began in late 2011, with the arrival in Canada of the U.S. low-fee giant Vanguard. Earlier this year, BlackRock's iShares family responded with some very significant fee cuts that led to yet another round of cuts by the BMO ETF family in late April. The Canadian equity category tells the story: The iShares S&P/TSX Capped Composite Index ETF (XIC) has a management fee of just 0.05 per cent, a level the BMO S&P/TSX Capped Composite Index ETF (ZCN) will match on April 30. The Vanguard FTSE Canada All Cap Index ETF (VCN) has a management fee of 0.12 per cent.

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With their paper-thin fees, XIC and ZCN are good options for core Canadian exposure. But there's a case for choosing VCN, even with a management fee that's more than two times higher. It comes down to one of those ETF selection factors beyond cost – the makeup of the underlying index. Both XIC and ZCN track the S&P/TSX composite index, which is the most widely followed indicator of Canadian stock market performance and covers 95 per cent of Canadian stock market capitalization. You get exposure to all the most widely traded large-cap stocks with these ETFs, plus medium and medium-to-small companies as well.

VCN tracks the lesser known FTSE Canada All Cap Index, which gives you significant exposure to small cap stocks. In fact, the index is about 15-per-cent weighted to small and small-to-medium companies. The more small-cap exposure an index has, the more risk and reward it offers. So it's no surprise to see in this year's strong Canadian market conditions that VCN was up 7.4 per cent for the year to April 22, while ZCN was up 6.9 and XIC was up 7.1 per cent. That's too small a slice of time for basing any firm conclusions about the relative merits of VCN and ZCN or XIC, but it does give you a sense of what different index choices can mean.

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