Meanwhile, the expense ratio for the Vanguard Growth Index ETF (VUG) also declined 2 basis points, and at 0.06%, is now closer to its peer, the iShares Core US Growth (IUSG). However, the indices and the resulting holdings of these products is distinct and impacting performance—VUG’s 12.0% year-to-date gain was ahead of IUSG’s 10.5%. The Vanguard offering has more consumer discretionary exposure (21% vs. 16%) and less industrials (8% vs. 12%), and the stocks chosen with these sectors are not identical.
For example, VUG owns Tesla, while IUSG does not, as the stock is not within the S&P index; (Vanguard Growth Index; Admiral (VIGAX) is also available for investors who prefer a mutual fund wrapper for 6 basis points).
Cheap Growth ETFs Constructed Differently
Source: CFRA Research’s MarketScope Advisor, April 27, 2017
The Importance Of The Big Picture
In ranking ETFs and mutual funds independently, CFRA Research combines holdings-level analysis with multiple fund attributes, including expense ratio and standard deviation.
The significance of understanding the holdings differences extends beyond equity products. The Vanguard Long-Term Bond (BLV) now costs 7 basis points and is 1 basis point cheaper than the iShares Core US 10+Year USD Bond (ILTB).
Yet the iShares product’s 3.42% total return year-to-date through April 27 was 29 basis points wider than BLV, highlighting the importance of what’s inside. ILTB has an approximately one-year lower duration, which will matter more than the higher fee if bond yields move higher. Conversely, it will hurt if rates do not move higher.
As more issuers move to lower fees in passive products, CFRA Research expects asset managers offering active alternatives will need to find ways to bring costs down. Because the case for charging 100 basis points or more than a Vanguard, iShares or Schwab product is dependent upon consistently outperforming—a task that’s hard for many to do.
But when choosing an ETF, fees are only one of the factors you should consider.
At the time of writing, neither the author nor his firm held any of the securities mentioned. Todd Rosenbluth is director of ETF and mutual fund research at CFRA, an independent research firm that acquired S&P Global Market Intelligence's equity and fund business in October 2016. He can be reached at [email protected]. Follow him at @ToddCFRA.