Innovation At What Cost?

April 01, 2008

Is this really all that unique of an idea, Jim? Or, is it just another way to repackage existing indexes at a higher price? 

The loss of Noel Archard by Vanguard to BGI was huge, and it's about time they brought him front and center, Jim.

But interestingly enough, even though BGI again beat the competition with a much-anticipated product, did they set the bar too high in terms of pricing?

Consider that you could already string together several different combinations of ETFs on the market and gain similar global exposure before ACWI's launch last week.

Why couldn't you use a combo of Vanguard's Total Stock Market ETF (AMEX: VTI) and FTSE All-World ex-U.S. ETF (AMEX: VEU) to gain the same comparable result? If you used about 40% VTI and 60% VEU, (ACWI had about 42% U.S. entering 2008), your annual expense ratio would wind up at 0.18% ... almost HALF as much as ACWI's 0.35%.

If you wanted to splice together four domestic and international ETFs instead of two, you could shave your costs even more.

Then there's the question of how effective parceling together a bunch of different MSCI indexes really proves to be in comparing long-term results. Many of BGI's rivals in other international asset classes have preferred to use benchmarks specifically designed to cover an entire region rather than combining individual country and/or neighboring markets.

They argue that such all-encompassing methodologies are superior since they can theoretically be tailored to weed out any overlaps between markets and create more exact weightings.

So while iShares has scored a marketing coup, will it translate into better exposure to world markets?

It will be interesting to see where the next group of truly global ETFs will choose to set their price floors. At 0.35%, BGI certainly can't be considered a price gouger. And if Vanguard takes the view that investors should just combine VTI and VEU, then it's unlikely anyone else is going to step up to the plate and undercut that opening ratio by much ...

So again, investors need to be aware of the price of ease of use. One-stop shopping might be easier, but is it really worth the added costs when you're dealing with strictly passive, index-based ETFs?

Think about it ... just doing a little bit of research to make sure you've got the lowest-priced option in your ETF portfolio could save a bundle in annual fees. And with indexing, isn't that the endgame?

For traders, I can see considering costs as more trivial in nature.  But for long-term-minded investors, sloppy ETF selection is a surefire way to throw money down the drain and reduce your returns over the long run. It kind of makes a real good argument for picky advisors. If they can drill down to the true low-cost options for your portfolio, they're probably making back their fees and then some over the course of your investing life!

That's assuming, of course, you don't want to do it yourself ... which is a shame when you have so many free resources available on the Internet these days!

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