Lower Investment Costs on ETFs

There are many different ways to successfully invest for the long-term. One such strategy is indexing. The idea of index investing is that over time very few, or maybe even none, of the various mutual funds out there, nor any portfolio you make yourself, beats the returns of the index anyways, especially after expenses. Therefore, you may as well just invest in the indexes themselves.

Of course, there is no way to directly invest in an index. To do so, you basically have two choices, index funds, or index-based Exchange Traded Funds, or ETFs. (Theoretically, with enough time and money, you could create your own portfolio to mimic an index, but this is often impractical.) When doing index investing, it is important to keep the expenses, or fees, of your investments as low as possible. After all, you aren’t paying for research or in-depth analysis, since the indexes already exist.

Index Investing and Expenses

Exchange Traded Funds, trade on the stock exchange, just like their name suggests. That means you buy them just like you do a stock, by putting in an order. For most investors, that purchase (and any subsequent sales) involves a commission, that’s part of your expenses. The rest of the investment’s cost comes from an internal fee charged by the company that runs the ETF.

One of the best known providers of ETFs is iShares. That company is owned by investing giant BlackRock.

Recently, BlackRock cut the internal expense charged on several of its so-called “core” ETFs, that is the big, standard ones. For example, the  iShares Core S&P Total U.S. Stock Market ETF, which tracks 1500 stocks cut the fee from 0.07% to 0.03%. As you can see, these were pretty low expense investments in the first place. Chances are you pay more in various brokerage fees, like an annual IRA fee, unless you have a large hunk of money invested in these. However, this does make these the cheapest ETF fees available, and that will bother Vanguard, who had the claim to the lowest ETF fee expenses.

Still, because these index-based ETFs are basically interchangeable with any other ETF that tracks the same index, may investors shop based on price. (This interchangeability also makes them a good place to look when attempting to find some losses to offset gains when doing tax-loss harvesting, since they give you about the same investment, without being alike enough to trigger the wash sale rules.)

Before the announcement, Vanguard was the low-price leader at 0.05% for the same funds. While it probably isn’t worth the price of a commission to switch, investors putting more money to work may look at the iShares ETFs now that they are, for the moment, cheaper than the Vanguard ones.

Of note, Charles Schwab also offers ETF investments, although they are much smaller players than iShares or Vanguard, and they announced that they too would cut the expense fee on some matching ETFs to 0.03% as well.

As of today, Vanguard has not announced that whether it would or would not, match the new lower cost fees for ETFs, although that may change.

Of course, smaller, more specialized ETFs continue to have higher expenses, so it is a good idea to compare for each block of your investment portfolio.