Robots Leave Money On The Table

September 04, 2014


  1. The SSgA pair—The SPDR S&P World ex-US ETF (GWL | B-96) and the SPDR S&P Emerging Markets ETF (GMM | C-87)—because they offer both Canada and small-caps
  2. The BlackRock ‘Core’ funds—the iShares Core MSCI EAFE ETF (IEFA | A-93) and the iShares Core MSCI Emerging Markets ETF (IEMG | B-99)—because of the small-caps, whose opportunity cost is higher than Canada’s
  3. The Schwab funds—the Schwab International Equity ETF (SCHF | A-95) and the Schwab Emerging Markets Equity ETF (SCHE | B-88)—which includes Canada but excludes small-caps
  4. The Vanguard funds or the legacy iShares funds—the iShares MSCI EAFE ETF (EFA | A-91) and the Vanguard FTSE Developed Markets ETF (VEA | A-91); and the iShares MSCI Emerging Markets ETF (EEM | B-98) and the Vanguard FTSE Emerging Markets ETF (VWO | C-90)—which offer neither Canada nor small-caps

Explicit Costs: Expenses, Tracking And Spreads

We don’t want to overpay for any puzzle piece, so we’ll have to balance the opportunity costs with fund expenses.

I put together a simple holding-cost estimate, which combines’s median tracking difference and trading spreads. You can see them in the table below. I also included’s more robust “Efficiency” and “Tradability” scores, which measure dozens of cost and risk factors:

Issuer Developed Ex-US Options Emerging Market Options Annual Holding Cost Estimate Combined Efficiency Score Combined Tradability Score
SSgA GWL GMM -0.97% 82 78
BlackRock (core) IEFA IEMG 0.13% 94 86
Schwab SCHF SCHE -0.11% 91 87
BlackRock (legacy) EFA EEM -0.25% 91 89
Vanguard VEA VWO 0.12% 89 89

Data: as of July 30, 2014

The Annual Holding Cost Estimate equals’s Median Tracking Difference plus 10 percent of’s median trading spread. I was comfortable with taking only 10 percent of the spread because Betterment’s Behavioral Economist, Dan Egan, models 10 percent annual portfolio turnover. Betterment’s emphasis on tax-loss harvesting suggests that 10 percent is most likely an aggressive estimate. In any event, spreads are minuscule for all these funds except the SSgA pair.

Median tracking difference measures the differential in one-year returns between the fund net asset value (NAV) and its underlying index. It’s the “kitchen sink” metric, combining fund expenses like the management fees and trading costs with optimization error and securities-lending revenues.

The Annual Holding Cost Estimates line up well with’s Efficiency and Tradability scores. The Vanguard funds lose a few Efficiency points for failing to disclose their portfolios daily.

Now, back to our ranked choice list. It’s time to put our puzzle together.


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