ETF Scary Monsters & Super Freaks

October 31, 2014

That’s right, 8 or 9 percent of your investment being bled out, year after year, to cover the internal taxes on the distributions from the underlying MLPs.

The C-Corp MLPs aren’t alone in having structural issues that turn them into bloodsuckers. The alternatives space is full of ETFs that take short positions and have to pay dividends out to those short positions.

But the real winner in my book is small funds that simply choose to not waive any expenses, passing the full costs of being small onto investors. The winner here is the Teucrium Soybeans ETF (SOYB), which has a straight-up cost, no fooling, of 3.97 percent. If that’s not insulting enough, in its worst one-year period, it actually trailed its own index not by that 3.97 percent, but by 12.4 percent.

Bloodsucker indeed.

Disney Princesses

My only dread for Halloween is seeing the parade of young girls in Disney “Princess” dresses. I am quite sure that tonight the annual parade will include at least a dozen Elsas from Frozen (which, to be fair, was the best Disney musical in a long, long time.)

And there’s nothing wrong with that. I just so often look down at the girls, as I hand them a candy bar, and think, “I know you love Ariel/Elsa/Snow White, but there are so many cooler things out there you could pretend to be!”

The Disney princesses of the ETF world are all of those enormous ETFs that remain popular year after year, despite the fact there are cooler, better products sitting right next to them.

People love the SPDR S&P 500 (SPY | A-97), and they’re not wrong to love it, but they could do better—actually quite a bit better. SPY has a headline expense ratio of 9 basis points, but on a median year, it actually trails the S&P 500 by more like 17 bps. Compare this with the iShares S&P 500 ETF (IVV | A-97), which is not only 2 bps cheaper, it actually habitually stays on target, clocking in 7 bps behind the index with laserlike focus.

Even inside iShares, the princess problem persists. The iShares MSCI Emerging Markets ETF (EEM | B-97) still gets most of the love, with $36 billion in assets, despite the fact it’s enormously expensive compared to its own sister fund, the iShares Core MSCI Emerging Markets Fund (IEMG | B-99).

EEM charges a whopping 67 basis points in fees, versus 18 bps for IEMG. And IEMG is just objectively better run to boot, with a median tracking difference just 3 bps points off its index, versus 55 for EEM.

Beware the sparkly dress.

 

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