World’s Cheapest ETF Portfolio

March 19, 2012

The 'World's Cheapest ETF Portfolio' just got cheaper, with all-in costs falling below 12 basis points per year (0.112 percent).

For the past five years, I've been tracking "The World's Cheapest ETF Portfolio." It's a well-diversified, broad-based ETF portfolio holding stocks (international and domestic), bonds, REITs and commodities. The portfolio weights are designed for an aggressive investor, and each asset class is populated with the lowest-cost ETF available.

In 2007, when I started tracking the portfolio, it was already pretty cheap, with all-in expenses of just 0.16 percent per year.

But massive growth in ETF assets—coupled with an all-out price war among ETF companies—has driven prices way, way down. The most recent round of price cuts by Vanguard and Schwab, along with the entrance of low-cost provider FocusShares, have driven the all-in costs down to just 0.112 percent, a drop of more than 27 percent in five years. Can 0.10 percent be far behind?

It's deflation we can all love.

The World's Cheapest ETF Portfolio

Asset Class

Weight

Fund

Ticker

ER

U.S. Equity

40%

Schwab U.S. Broad Equity

Focus Morningstar US Market Index ETF

SCHB

FMU

0.06%

0.05%

Developed Equity

30%

Schwab International Equity
Vanguard MSCI EAFE ETF

SCHF
VEA

0.13%
0.12%

Emerging Markets Equity

5%

Schwab Emerging Markets Equity
Vanguard MSCI Emerging Markets

SCHE
VWO

0.25%
0.20%

Fixed Income

15%

Vanguard Total Bond Market
Schwab U.S. Aggregate Bond ETF

BND
SCHZ

0.12%
0.10%

REITs

5%

Vanguard REIT

VNQ

0.12%

Commodities

5%

UBS E-TRACS DJ-UBS Commodity ETN

DJCI

0.50%

All-In Costs

0.125%
0.112%

 

Of the recent price cuts, I find the emerging markets piece the most impressive. The idea that you can get broad-based exposure to emerging markets for 0.20 percent per year is stunning to me.

On the flip side, I remain frustrated by the persistent high costs of commodities. While DJCI is by far the cost leader—most commodity ETFs charge 0.75 percent per year—its 0.50 percent expense ratio sticks out like a sore thumb in this ultralow-cost portfolio.

I've had various suggestions for assets to add to this portfolio; specifically, gold, TIPS, international bonds, frontier markets and hedge funds. They're all reasonable suggestions, and would likely improve the portfolio from an optimization perspective.

I've decided, however, to keep the portfolio and weights intact in the interests of stability, so that I can compare apples-to-apples when I look at this portfolio against the exposures in its 2007 instantiation.

Still, for those of you who are interested, I've listed below the cheapest ETF available in each of those areas:

Cheapest ETFs In Select Market Segments

Asset Class

Name

Ticker

Expense Ratio

Gold

iShares Gold Trust

IAU

0.25%

TIPS

Schwab U.S. TIPS ETF

SCHP

0.14%

International Fixed Income

iShares S&P/Citigroup International Treasury Bond Fund

IGOV

0.35%

Frontier Market Equity

Guggenheim Frontier Markets

FRN

0.70%

Hedge Fund Replication

ProShares Hedge Fund Replication ETF

HDG

0.95%

[Correction: A previous version of this article listed funds from iShares and PIMCO as the lowest cost TIPS ETFs, charging 0.20% each; in fact, Schwab offers a competing fund priced at just 0.14%.  The table has been amended.]

 

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