There are several factors that influence the decision of
selecting an ETF for investment. Such factors include the past
performance, holdings, sector exposure and concentration. Beyond
these examples, expenses can also play an important role in the
decision making process as well.
The expense ratio of an asset fund refers to the total
percentage of fund assets that are taken on a yearly basis to pay
for administrative, management, advertising and all other costs
that go into running an ETF. While these ratios are much smaller
for ETFs than they are for mutual funds on average, investors
should note that expenses still play a crucial role in determining
the best fund in a segment.
Furthermore, while many products may appear similar on the
surface—with similar industry, holdings, and market cap focuses—the
expense ratio can often be the main, and usually key, difference
between two products. After all, why would investors want to pay
three times as much for virtually the same product? (see more in
the Zacks ETF Center)
Beyond this, some investors are bent on keeping expenses at
their lowest possible level, only purchasing the cheapest products
in the industry. By doing this, some can build a well diversified
portfolio for under 25 basis points including major holdings which
cost investors less than 0.12% per year. For these investors, we
have highlighted the 25 Cheapest ETFs on the market today in
ascending order of expense ratios:
Focus Morningstar Large Cap ETF
(FLG)
Investors seeking to invest in large cap companies of the U.S
market at the lowest cost should look at FLG which replicates the
Morningstar Large Cap Index. The product charges investors just
five basis points a year, tied for the lowest in the entire ETF
world.
With large cap companies like Apple Inc. (AAPL), Exxon Mobil
Corporation (XOM), Microsoft Corporation (MSFT) in the top 3
position of the holding list, the fund also appears to be
diversified with just 23.86% of assets in the top 10 holdings.
FLG has a net asset value of $26.8 million and has total
holdings of 261 stocks.
The attractive holding pattern coupled with low cost has helped
the fund to deliver a solid returns for many large cap focused
investors while those who have a Scottrade account were able to
trade this security—and other FocusShares products—for free.
Focus Morningstar US Market ETF
(FMU)
Another low cost choice is FMU, a fund that tracks securities
across market capitalization levels and charges just five basis
points a year in fees. In total, the product holds just under 1,100
firms while putting under 18% in its top ten holdings.
Apple Inc. (AAPL), Exxon Mobil Corporation (XOM) and
International Business Machines Corp. (IBM) occupy the top 3
position in the fund. The fund delivered a total return of 7.6%
over a period of one year.
Vanguard S&P 500 ETF
(VOO)
Investors looking to invest in the large cap sector of U.S
equity market or S&P 500 index stocks at the minimal cost
should look to VOO as the fund charges a premium of just 6 basis
points (read Looking For Safety? Try These Money Market ETFs).
The fund’s holding has a total of 503 stocks with just 20.1%
invested in the top 10 holdings, implying that the assets of the
fund are spread out among companies. The low cost structure of the
fund has helped it to deliver a return of 8.5% over a period of one
year.
Schwab U.S. Broad Market ETF
(SCHB)
Launched in November 2009, the fund with a focus on multi cap
equities seeks to replicate the performance of the Dow Jones US
Broad Stock Market Total Return Index. The fund, which has a total
asset base of $1.0 billion invested in 1,721 stocks, charges a
premium of just 6 basis points from investors on a yearly
basis.
The fund also offers diversification benefit with just 16.97% of
its asset base invested in the top 10 holdings. With low cost,
attractive holding pattern and diversification benefit, the fund
has delivered decent returns and could be a low cost pick for those
who have Charles Schwab accounts due to the commission-free trading
the broker offers on its ETFs.
Vanguard Total Stock Market ETF
(VTI)
With a focus on large, mid and small capitalization companies,
the fund seeks to track the performance of the MSCI US Broad Market
Index at a minimal cost of just 7 basis points. The fund holds a
total of 3,302 stocks and offers investors diversification with
just 16.5% of assets invested in the top 10 holdings (read Five
Great Global ETFs For Complete Exposure).
Apple Inc. (AAPL), Exxon Mobil Corporation (XOM) and Microsoft
Corporation (MSFT) occupy the top 3 position in the fund. The
product has performed admirably over the past year and remains a
solid choice for those looking for broad market exposure across
market cap levels.
Schwab U.S. Large-Cap ETF
(SCHX)
Launched in November 2009, this fund looks to invest in large
cap equity by following the performance of the Dow Jones US
Large-Cap Total Stock Market Index. The fund, which has a total
asset base of $867.9 million invests in 748 stocks, charges a
premium of just 8 basis points from the investors.
The fund also offers solid diversification benefits as just
18.96% of its asset base is invested in the top 10 holdings. With
low cost, attractive holding pattern and diversification benefit,
the fund has delivered a return in-line with other large cap ETFs
over the past one year.
PIMCO 1-3 Year U.S. Treasury Index Fund
(TUZ)
Investors that look for a stable principal value and virtually
no credit risk should invest in TUZ. TUZ is designed to track the
Merrill Lynch 1-3 Year U.S. Treasury Index which puts the product
in short-term U.S. Treasury securities.
With maturities ranging from one to three years, price
fluctuations may be low relative to longer-dated bonds, yet yields
may be much lower than higher duration securities as well. For
this, the fund charges a premium of 9 basis points delivering a
total return of 1.45% over a period of one year.
S&P 500 Index Fund (IVV)
Another ETF which tracks the performance of the large
capitalization sector of the U.S. equity market or S&P 500 is
IVV but with an expense ratio of 9 basis points, three basis points
higher than what VOO charges.
The fund holds a total of 501 stocks in the portfolio with total
net assets invested amounting to $29,624.1 million. Still, the
concentration risk is quite low while the product has
unsurprisingly performed in-line with VOO over the past year.
SPDR S&P 500
(SPY)
Initiated in January 1993, SPY is one of the inexpensive ETFs
with the highest traded volume. It has been designed to track the
performance of the S&P 500 Index. The most popular fund among
investors, SPY trades about 135 million shares in a regular session
and charges a fee of just 0.10% to investors (read Three Unlucky
Equity ETFs).
The fund’s concentration risk is also low at 20.53%, which means
the fund is nicely spread out among its top components. Meanwhile,
the product also pays out a decent yield of 2% and is a great proxy
for the U.S. market as a whole.
Schwab U.S. Aggregate Bond ETF
(SCHZ)
Launched in July 2011, the ETF seeks investment results that
track the total return of the Barclays Capital U.S. Aggregate Bond
Index, before fees and expenses. This inexpensive fund charges a
premium of 10 basis points with total holdings of 624 stocks.
The fund also appears to be diversified as it just invests
13.27% of the asset in top 10 holdings. The fund has delivered a
return of 1.36% over a period of 6 months.
Vanguard Total Bond Market ETF
(BND)
Launched in April 2007, BND tracks the Barclays Capital U.S
Aggregate Bond Index, charging an expense ratio of 11 basis points
from investors. The index, which BND replicates, measures the
performance of the U.S. investment grade bond market.
The fund has a total of 5,086 bonds in its portfolio with an
average maturity of 7.2 years and with total net assets amounting
to $16.1 billion. The fund has 69.7% of assets invested in
government bonds. (Time To Get Regional With Bond
ETFs)
SPDR Barclays Capital Short Term Corporate Bond ETF
(SCPB)
The SPDR Barclays Capital Short Term Corporate Bond ETF seeks to
provide investment results that, before fees and expenses,
correspond generally to the price and yield performance of the
Barclays Capital U.S. 1-3 Year Corporate Bond Index.
The fund, with total net assets of $902.9 million, charges a
premium of 12 basis points. SCPB delivered a total return of 2.46%
over a period of one year (read Van Eck Launches Fallen Angel Bond
ETF).
Schwab Short-Term U.S. Treasury ETF
(SCHO)
Investors that look to invest in government bonds should look to
SCHO. SCHO is designed to track the Barclays Capital U.S 1-3 Year
U.S. Treasury Index. This fund primarily invests in U.S. Treasury
Securities with maturities ranging from one to three years and for
this the fund charges a premium of 12 basis points for a total
holding of 38 bonds. It delivered a total return of 1.28% over a
period of one year.
Schwab Intermediate-Term U.S. Treasuries ETF
(SCHR)
This ETF, with an expense ratio of 12 basis points, seeks
investment results that track the price and yield performance,
before fees and expenses, of the Barclays Capital U.S. 3-10 Year
Treasury Bond Index. The ETF invests in U.S Treasury securities
that have a remaining maturity of three to ten years, are rated
investment grade, and have $250 million or more of outstanding face
value.
The fund invests its total asset of $148 million in roughly 48
bonds. The product puts a modest 35.84% of its assets in the top
ten holdings and could be a nice compliment to investments that are
made in either short or long term government securities.
Focus Morningstar Real Estate ETF
(FRL)
Launched in March 2011, the fund seeks to replicate the
Morningstar Real Estate Index with an expense ratio of 12 basis
points. The Underlying Index is a subset of the Morningstar US
Market Index and consists of mortgage companies, property
management companies and REITs (see Real Estate ETFs: Unexpected
Safe Haven).
The fund has a total of 99 stocks in its basket while putting
about 41% of assets in the top ten. Over the past year the product
has been a solid performer as real estate has rebounded in recent
months while the product has also stood out from a yield
perspective as well.
Vanguard MSCI EAFE ETF
(VEA)
This ETF with an expense ratio of 12 basis points seeks to track
the performance of the MSCI EAFE Index, which measures the
performance of equity markets in European, Australasian, and Far
Eastern markets. VEA is currently focused on Europe (nearly
two-thirds of the portfolio) while a big chunk still goes to
Pacific assets as well.
The fund has a total holding of 898 stocks but puts a modest
14.7% in its top ten holdings. Unfortunately, European stocks have
underperformed as of late, as the product is slumping compared to
its American focused counterparts.
Vanguard REIT ETF (VNQ)
Launched in September 2004, the fund tracks the U.S. REIT market
by following the performance of the MSCI US REIT Index. The fund,
which has a total asset base of $24.4 billion, is invested in 113
stocks in total and charges a premium of just 12 basis points to
investors (see Top Three Mortgage Finance ETFs).
The fund also offers a decent diversification benefit as 45.8%
of its asset base is invested in the top 10 holdings. With low
cost, attractive holding pattern and diversification benefit, the
fund, much like FRL, has delivered solid returns over the past one
year period.
Vanguard Russell 1000 ETF
(VONE)
VONE has been structured to invest in stocks in the Russell 1000
Index, a broadly diversified index made up of large U.S. companies,
at a cost as low as possible of 12 basis points.
The fund holds a total of 980 stocks with just 18.1% invested in
the top 10 holdings, justifying the fact that the assets of the
fund are spread out among companies. The low cost structure of the
fund has helped it to deliver a return of 7.76% over a period of
one year.
SPDR Barclays Capital Short Term Treasury ETF
(SST)
The ETF with an expense ratio of 12 basis points seeks
investment results that track the price and yield performance,
before fees and expenses, of the Barclays Capital 1-5 Year U.S.
Treasury Index. The ETF invests in U.S Treasury securities that
have a remaining maturity of one to five years, are rated
investment grade, and have $250 million or more of outstanding face
value (read Seven Biggest Bond ETFs By AUM).
Despite the cheap cost of the fund, it hasn’t really caught on
with investors and has amassed just six million in AUM.
Nevertheless, the product could be another interesting way to
diversify a portfolio into low risk securities.
Wilshire 5000 Total Market ETF
(WFVK)
With a focus on large, mid and small capitalization companies,
the fund seeks to track the performance of the Wilshire 5000 Index
at a minimal cost of just 12 basis points. The fund holds a total
stock of 1185 stocks and offers investors diversification with just
17.5% of assets invested in the top 10 holdings.
Apple Inc. (AAPL), Exxon Mobil Corporation (XOM) and Microsoft
Corporation (MSFT) occupy the top 3 positions in the fund, and like
many products on the list, it has had a solid start to the year
although it has tumbled back in the spring.
Focus Morningstar Small Cap ETF
(FOS)
Investors seeking to invest in small cap companies of the U.S.
market at the lowest cost should look for FOS which replicates the
Morningstar Small Cap Index. The product charges just 12 basis
points a year and hasn’t really amassed a great deal of assets with
the total AUM coming in below $6 million at this time.
Top holdings aren’t exactly household names as small cap
companies like Superior Energy Services, Inc. (SPN), Solutia Inc.
(SOA), Amylin Pharmaceuticals, Inc. (AMLN) are the top three firms
in the ETF. The fund also appears to be highly diversified with
just 3.09% of assets in the top 10 holdings with over 700 stocks
overall in the portfolio.
Focus Morningstar Mid Cap ETF
(FMM)
Launched in March 2011, this is one of the cheapest ways to play
the often overlooked mid cap space. The product follows the
Morningstar Mid Cap Index but hasn’t really caught on with
investors, trading just 6,000 shares a day on average (see Mid Cap
ETF Investing 101).
Nevertheless, the ultra low 12 basis point cost and the solid
portfolio could make it an interesting pick for some investors. The
product puts just 4.5% of its portfolio in the top ten holdings
making it a well diversified play and also one that investors
aren’t likely to have a great deal of exposure to on their own
anyway.
Vanguard Large-Cap ETF
(VV)
With a focus on large cap companies, the fund seeks to track the
performance of the MSCI US Prime Market 750 Index at a minimal cost
of just 12 basis points. The fund, which holds a total of 750
stocks, offers investors diversification with just 18.8% of assets
invested in the top 10 holdings.
Apple Inc. (AAPL), Exxon Mobil Corporation (XOM) and Microsoft
Corporation (MSFT) occupy the top 3 position in the fund. The fund
delivered a total return of 8.16% over a period of one year.
International Equity ETF
(SCHF)
The fund with an expense ratio of 13 basis points seeks to track
the performance of the FTSE Developed ex US Index. The FTSE
Developed ex-US Index comprised approximately 85% large-cap stocks
and 15% mid-cap stocks from more than 20 developed markets
excluding the U.S (see Three Overlooked Emerging Market ETFs).
The fund has a total holding of 1,055 stocks with 10.57% of
assets invested in the top 10 holdings. The fund delivered a total
return of negative 11.76% over a period of one
year.
U.S. Small-Cap ETF
(SCHA)
Investors seeking to invest in small cap companies of the U.S.
market at the lowest cost should look for SCHA which replicates the
Dow Jones US Small Cap Total Stock Market Total Return Index and is
one of the cheapest funds in the ETF world with an expense ratio of
just 13 basis points.
With small cap companies like MICROS Systems, Inc. (MCRS),
Taubman Centers Inc. (TCO), and Arthur J Gallagher & Co. (AJG)
in the top 3 position of the holding list, the fund appears to be
highly diversified with just 2.41% of assets in the top 10 holdings
while possessing over 1,750 stocks in its entire basket.
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