This ETF Portfolio Pays You To Hold It

For years, I’ve tracked the 'world’s lowest-cost ETF portfolio.' Now I can do one better.

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Reviewed by: Matt Hougan
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Edited by: Matt Hougan

For years, I’ve tracked the 'world’s lowest-cost ETF portfolio.' Now I can do one better.

For the past six years, I’ve kept track of what I call the world’s lowest-cost ETF portfolio. It’s an aggressive portfolio holding the ETFs with the lowest expense ratio in six different areas of the market:

  • 40 Percent U.S. Equities
  • 30 Percent International Developed Market Equities
  • 5 Percent Emerging Market Equities
  • 5 Percent REITs
  • 15 Percent Fixed Income
  • 5 Percent Commodities

When I started tracking the portfolio, it had a blended expense ratio of 0.16 percent per year, meaning you paid $16 per year for every $10,000 invested. I thought that was pretty cool.

ETF prices fall year after year, however, and today, that blended expense ratio is down to just 0.08 percent per year.

Here’s the portfolio:

The World's Lowest-Cost ETF Portfolio
Asset ClassWeightFundTickerExpense
Ratio
U.S. Equity40%Schwab U.S. Broad Equity ETFSCHB0.04%
Developed Markets Equity30%Schwab International Equity ETFSCHF0.08%
Emerging Markets Equity5%Schwab Emerging Markets EquitySCHE0.14%
Fixed Income15%Schwab U.S. Aggregate BondSCHZ0.05%
REITs5%Schwab U.S. REIT ETFSCHH0.07%
Commodities5%UBS E-TRACS DJ-UBS Commodity TR ETNDJCI0.50%
Blended Expense Ratio0.08%

For just $8 a year, you get exposure to more than 4,000 stocks, 1,500 bonds, 25 commodities, 45 different countries and a dozen difference currencies. That’s awesome.

But what if I told you that you could do one better? What if you could actually build a portfolio that paid you 0.05 percent a year to hold it?

 

The Better-Than-Free ETF Portfolio

Here at ETF.com, we keep close track of something we call median tracking difference. I recently called it the most important statistic to consider when buying an ETF.

Median tracking difference compares how well a fund performs compared with the index it aims to track over the average one-year period. If the index was up 10 percent for the year, how much was the fund up? 9.90 percent? 9.80 percent?

We calculate the statistics by looking at two years’ worth of rolling one-year periods, and take the median value.

For instance: the Schwab International Equity ETF (SCHF | B-96) mentioned above only charges 0.08 percent in fees, but according to our data, it’s lagged its index by 0.13 percent over the average one-year period. In a perfect world, you would expect a fund to trail its benchmark by its expense ratio, but trading costs, tracking mistakes and other factors take a toll too.

Increasingly, however, ETF issuers are finding ways to manage their portfolios so well that they’re able to claw back some of those expenses through careful trading, securities lending and other factors.

The Schwab U.S. Broad Market ETF (SCHB | A–100), for example, has actually beaten its index by 0.02 percent a year over the average one-year period.

It’s paid you to hold it!

There are enough ETFs out there succeeding like SCHB that you can build a broadly diversified portfolio that, on a blended basis, would have paid you to hold it over the average one-year period.

The Better-Than-Free ETF Portfolio
Asset ClassWeightFundTickerMedian Tracking Difference
U.S. Equity40%Schwab U.S. Broad Equity ETFSCHB+0.02%
Developed Markets Equity30%Vanguard FTSE Developed MarketsVEA+0.16%
Emerging Markets Equity5%SPDR Emerging MarketsGMM+0.01%
Fixed Income15%SPDR Barclays Aggregate BondLAG-0.05%
REITs5%Vanguard REITVNQ-0.04%
Commodities5%UBS E-TRACS DJ-UBS Commodity TR ETNDJCI-0.48%
Blended Tracking Difference +0.05%

How cool is that? Rather than charging a fee to provide exposure to the market, this portfolio actually beat its blended index by 0.05 percent over the average one-year period.

Of course, unlike expense ratios, median tracking difference is not guaranteed. The numbers shift over time, and vary with your holding period. But being able to earn back your expense ratios and then some while holding 4,000 stocks, 1,500 bonds and so on is a sign of how far ETFs have come.

Getting an institutional-caliber portfolio at low costs? Pretty cool. Getting one that pays you to hold it? That’s nothing short of amazing.

 


 

At the time this article was written, the author held a position in VEA. Contact Matt Hougan at [email protected].


Matt Hougan is CEO of Inside ETFs, a division of Informa PLC. He spearheads the world's largest ETF conferences and webinars. Hougan is a three-time member of the Barron's ETF Roundtable and co-author of the CFA Institute’s monograph, "A Comprehensive Guide to Exchange-Trade Funds."