Is The Cheapest ETF The Best?

February 01, 2012

State Street recently lowered the expense ratios on its sector SPDRs to 0.18 percent, making them once again the cheapest U.S. sector ETFs around.

In addition to being the cheapest, as we reported, the SPDRs are by far the easiest to trade. Their liquidity blows away that of their competitors in every sector they compete in.

The table below shows the top three funds by average daily trading volume in each U.S. sector, with the sector SPDRs highlighted in light blue. The average daily trading volume, or “AD$V,” is displayed in millions of dollars.

Top 3 funds by ADV per US sector


As you can see, the difference between the sector SPDR and the next most liquid fund within its sector is huge across the board.

However, the sector SPDRs’ superior liquidity is old news—large and active traders out there have known about this for a while—so I can’t help but wonder whether the 0.02 percent expense ratio drop will have much of an impact on investor interest. After all, in most sectors, the SPDR’s narrower bid/ask spread provides more than 0.02 percent in savings.

It’s a great marketing coup to be able to claim the cheapest exposure to a given sector, although investors should be aware that the sector SPDRs don’t provide the broadest exposure.

First, they draw their holdings exclusively from the S&P 500, and thus exclude a lot of companies. For investors who only want exposure to the large-cap portion of the segment, that’s probably a good thing, but for those who want broader exposure, there are better options.

The table below compares the number of holdings in the major market-cap-weighted ETFs in each sector:


Number of Holdings in Broad Sector ETFs

# of Holdings in Broad Sector ETFs


It’s clear that the SPDR holding lists are much smaller than Vanguard’s, FocusShares’ and iShares’. The differences are most pronounced in big segments like financials, whereyou could spend 0.18 percent for exposure to 81 companies, or spend an extra 0.01 percent to get 508 companies.

To be fair, large-cap-focused investors who need massive liquidity can’t do better than the sector SPDRs. However, investors who want broader exposure need to look beyond the price-tag war to find the fund that really suits their needs.



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