Be Aware Of Evolving ETF Characteristics

February 13, 2015




The ability to more accurately impart views is clearly a plus for investors, but it certainly comes at a cost. HACK currently has an expense ratio of 0.75 percent, or $75 for each $10,000 invested.


Costs Grinding Higher

With active management and so-called alternative beta playing a larger role in new launches, and traditional beta products getting much more granular, surely there’s an impact on cost.


After all, product cost structure is a lot higher when managers and analysts are being compensated to actively seek alpha. Similarly, investors have to pay for all the intellectual property associated with alternatively weighted schemes. For more “niche-y” products, it’s also hard not to expect ETF providers to try to make up for what they’ll miss in volume by charging higher fees.





The chart above shows the distribution of the expense ratios attached to all of the ETPs launched in 2014. Roughly 70 percent of the products launched sport an expense ratio between 40 and 100 basis points. In our opinion, that’s a lot.


Now, I understand that it’s all relative—providing access to some asset classes is simply more expensive than providing access to others. However, given the fact that you can get global, multi-asset-class exposure for just 8 basis points via Matt Hougan’s World’s Cheapest ETF Portfolio, anything over 40 basis points seems like a king’s ransom.


Either way, for particularly discerning investors, the cost differential between expensive ETPs and cheap mutual funds is starting to get a little blurry, and this will likely continue as the industry evolves.


The Rest Of The Story

Don't get me wrong. By and large, ETFs are still an investor’s best bet for all of the reasons mentioned above. It just seems that there have been a lot of exceptions to these rules of late. While the deviation in management style, diversification, and cost have been the most profound, there's also been subtle shifts in tax efficiency and liquidity.


Take, for example, long U.S. dollar exposure, one of the hottest trades of last year. In 2014, the Bloomberg Dollar Spot Index was up almost 11 percent. Popular ways to play this move involved the use of currency forwards on a stand-alone basis, like the WisdomTree Bloomberg U.S. Dollar Bullish Fund (USDU | 67), or as part of a hedged strategy, like the WisdomTree Japan Hedged Equity Fund (DXJ | B-57).


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