ETF Of The Week: Unexpected Horse Race

May 17, 2019

Difference Of 10%

However, what ultimately may influence tracking error more than the strategies SUSL and USSG use to track their indexes is how much of these funds' portfolios are allotted to tracking their indexes.

In USSG, at least 80% of net assets are used to track the securities in the ETF's benchmark—leaving up to 20% free to be invested in other securities not in the index, but which the manager believes will help improve fund performance. These can include cash and cash equivalents, money market instruments and derivatives, such as futures, options, swaps and so forth.

It's a nigh-universal caveat in ETF-land; and SUSL includes similar language in its prospectus. Except in SUSL, at least 90% of the fund's assets will be used to track securities in the benchmark, not 80%. Meaning, only 10% or less may go toward these nonindex-related securities.

Will it matter? Only time will tell. But keep your eye on tracking error for these two funds. These tiny discrepancies in how each ETF tracks its index could explain any disconnects that arise.

Total Cost Of Ownership

Of course, what most investors likely will notice first about these two ETFs is the difference in price tag. USSG has an expense ratio of 0.10%, while SUSL has an expense ratio of 0.15%.

Given what we've seen of the fee wars thus far, many investors may not look any further at these funds than that. But expense ratio doesn't tell the whole story on costs. Trading spreads matter as well.

USSG has an average spread of 0.16%, which is relatively high for a large and midcap fund. SUSL, though it has only been trading for about a week, has an average trading spread of roughly half that, at 0.07%.

Real Spider-Man?

Which of these two almost identical ETFs will have staying power long term? Maybe both. That's the bet Ilmarinen is making, at least; the pension company not only helped develop both products, but then poured close to $1 billion into each at launch to help drive their success.

But at the moment, we're reminded of the internet meme of Spider-Man pointing at Spider-Man. The only way to figure out which is the real Spider-Man of these two ETFs is by keeping an eye on their future flows.

Contact Lara Crigger at [email protected]

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