As ETF Fees Drop, Is Picking the Cheapest Fund Really the Best Option?

The host of exchange traded fund (ETF) options available to investors is staggering. In both Canada and the United States, finding an ETF to take the place of a specific group of stocks is really not that difficult to do; in many cases, these funds have been composed for pennies compared to traditional mutual funds, providing investors with the excess return represented by the difference in fees one pays over time.

While fees will certainly play an integral role in managing how much money one is able to garner from an investment portfolio over the long-term (1% or 2% per year on a sizable portfolio is a lot of money), deciding between ETFs which offer 0.21% or 0.22% can be a much more difficult decision.

ETFs have largely moved toward a cost-cutting model across the board in which a “race to the bottom” has led to certain funds finding every cost cutting advantage possible; from cutting pages out of the annual prospectus to save on mailing fees to turning over their portfolios on a less frequent basis, as a means of cutting back on unnecessary trading fees and holding securities longer.

For investors trying to decide between two ultra-low cost ETFs, my take would be to consider those with the highest correlation to the overall stock market, as well as those which may be sector weighted instead of market capitalization weighted, to take advantage of the diversification effects of under-owning some of the bigger names and owning some of the smaller names on any index.

Invest wisely, my friends.