S&P SmallCap 600 Index
Eight distinct index funds track the S&P SmallCap 600 Index, whereas only one ETF tracks the same index (see Figure 9). (There are, however, iShares ETFs tracking both the S&P SmallCap 600/Barra Value Index and the S&P SmallCap 600/Barra Growth Index).
The SmallCap ETF had a tax cost ratio of 0.26, only three basis points better than the 0.29 asset-weighted average for the eight index funds. As for performance, the ETF was superior to the eight index funds by 30 basis points-which is explained by the 32 basis point differential in expense ratios.
Russell 2000 Index
In Figure 10, the iShares ETF that tracks the Russell 2000 Index was compared against the asset-weighted average of 10 index funds. The ETF had a superior tax cost ratio by 12 basis points. The three-year return of the iShares ETF trailed the Russell 2000 Index by 15 basis points, but that was five basis points better than anticipated given its expense ratio of 20 basis points. The average three year return of the 10 index funds was 10.69 percent, or 79 basis points behind the raw index and 64 basis points behind the ETF. The underperformance of the index funds is larger than would be expected given an average expense ratio of 60 basis points.