How To Make A Dirt Cheap ETF Even Cheaper

October 06, 2014

Navigating Vanguard’s share-class maze.

After a seven-blog tour of the robo advisors aimed at helping my son decide how to spend his bar mitzvah money, it’s now time for him to invest. I examined robo investment philosophy, asset allocation, ETF selection and tax-loss harvesting, but my son chose, for now, to buy the Vanguard Total World Stock ETF (VT | B-100).

VT is’s “Analyst Pick” among the global total equity market funds, because it offers the broadest, most unbiased, cheapest exposure to the global equity markets. Easy peasy!

Except, actually, it isn’t. My son can get the same exposure for less—within Vanguard.

Easy Tricks

There are two tricks, one obstacle, and a clever backdoor that will allow him to capture 0.30 percent savings. Here’s how.

Economies Of Scale

Combining VTI and VXUS creates virtually the same exposure as VT’s, provided you weight each proportionally. As of Sept. 1, 2014, that meant 49.62 percent to VTI and 50.38 percent to VXUS. This brings annual fund fees down to 0.095 percent, versus 0.18 percent for VT.

Say what?

Joel Dickson, Vanguard’s global head of investment research and development, explained that Vanguard passes along economies of scale fund by fund. VT’s $5.7 billion of net assets (all share classes including mutual fund shares and ETF shares) pales beside VTI’s $ 401.2 billion and VXUS’s $133.4 billion, as of Aug. 31, 2014. VTI and VXUS can spread fund expenses across a huge asset base; VT isn’t there yet.

True Holding Costs

These economies of scale show up starkly in real-world holding costs, as revealed by’s Analytics’ median annual tracking difference. This metric rolls up costs, like fees and tracking error, along with income such as securities-lending revenues and tax recapture.

As of Sept. 30, 2014, VT underperformed its index by a median 0.24 percent per year. But VTI and VXUS actually outperformed their underlying indexes, by 0.02 and 0.03 percent, respectively. Now that’s operating efficiency.

The VTI/VXUS combo would have saved you 0.265 percent annually over VT, on average, over the past two years.

But you can do even better.


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