Important clarification: For the purposes of this article, "cheaper" does not refer to valuation, but rather to ETF expense ratios and cost of ownership. Other cost of ownership factors include an ETF's bid/ask spread and trading commissions.
With an expanding lineup of commission-free ETF offerings at various brokerage firms, investors can eliminate the cost of trading. However, acknowledging that trading for free is a good thing, it must also be acknowledged that there are more than 1,400 exchange-traded products trading in the U.S. and most of those cannot be traded commission-free.
With those factors in mind, we screened for the ETFs with the lowest expense ratios across several sub-segments of the equity-based fund universe to see if the cheapest ETFs can lead investors to the highest returns. The following funds include broader market ETFs, dividend plays and a well-known rivalry between sector funds.
Schwab U.S. Large-Cap Value ETF (NYSE:SCHV) The Schwab U.S. Large-Cap Value ETF competes directly with the Vanguard Value ETF (NYSE:VTV). Chuck says as much on his web site. In this comparison, commissions are somewhat of a moot point because Schwab clients can trade SCHV commission-free while Vanguard clients get the same deal on VTV.
Regarding expense ratio, SCHV charges a scant 0.07 percent per year, although it should be said that VTV is by no means pricey at 0.1 percent. VTV is the larger of the two funds and not just by assets. The Vanguard offering is home to 416 stocks compared to 352 for SCHV. The two also track different indexes. VTV tracks the MSCI US Prime Market Value Index while the Dow Jones U.S. Large Cap Total Stock Market Index is the underlying index for SCHV.
Getting down to the heart of the matter, SCHV has surged almost 40 percent since its December 2009 debut. VTV is up just over 36 over the same time. In this case, cheaper has been better in terms of the total returns offered by SCHV.
Vanguard Consumer Staples ETF (NYSE:VDC) Late last year, Vanguard lowered fees on its popular sector fees making almost all of them less expensive than the comparable Select Sector SPDRs offered by rival State Street Global Advisors. In the case of the Vanguard Consumer Staples ETF and the Consumer Staples Select Sector SPDR (NYSE:XLP), VDC is less expensive by four basis points at 0.14 percent per year.
Additionally, Vanguard clients can trade VDC commission-free. Although State Street has hooked with Schwab to offer some SSgA ETFs commission-free, XLP is not among them.
This comparison is somewhat tricky because VDC has only been operating for three months with lower fees than XLP. On a year-to-date basis, VDC is slightly ahead of its SPDR rival. Interestingly, VDC has outpaced XLP by about 400 basis points over the past five years and a fair amount of that time saw XLP as the lower-fee option of the pair.
SPDR S&P Dividend ETF (NYSE:SDY) In terms of fees, the SPDR S&P Dividend ETF is fair with an annual expense ratio of 0.35 percent. SDY, the second-largest U.S. dividend ETF by assets under management, competes with a growing number of funds, but one of its prime competitors is the WisdomTree LargeCap Dividend Fund (NYSE:DLN).
DLN, which is nearly seven years old, charges a yearly expense ratio of 0.28 percent and can be traded commission-free by E-Trade clients. Those factors are good news for investors considering DLN, but they do not highlight the most important difference between these two ETFs.
SDY uses a familiar weighting methodology among dividend ETFs, that being a focus on length of dividend increase streaks. Conversely, the WisdomTree LargeCap Dividend Index (WTLDI), DLN's underlying index, is "dividend weighted annually to reflect the proportionate share of the aggregate cash dividends each component company is projected to pay in the coming year," according to WisdomTree.
Over the past two years as U.S. dividend stocks have undergone a post-financial crisis resurgence, DLN is up nearly 24 percent compared to a gain of 22 percent for SDY.
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