ETF Selection Criteria – Cost.
Last time we proposed ETF selection criteria to help the Individual Investor sort through the multitude of ETFs available in order to make simple, sensible choices for their portfolio. Another criterion is …
Simple usually means least costly. Complexity usually adds fees and/or risk(s). So look for simple.
For reference, the average Institutional Investor pays ~0.40% for ‘all in’ operating costs for their entire portfolio (Source: CEM). The breakdown is about ~0.17% to 0.60% for bonds, ~0.35% – 0.72% for stocks and ~0.60% – 0.97% for real estate and other ‘alternatives’. (Source: bfinance). The majority of Pensions fall into the 0.20% to 0.80% range. (Source: Ambachtsheer). (It looks like the CPP pays ~0.20% for ‘all in’ operating costs).
An Individual Investor should expect to pay ~0.40% for an ETF portfolio. The CORE (i.e. simple) ETFs will be least costly. Eg. XIU is 0.17%. SPY is 0.10%. VV is 0.12%. The more complex the ETFs (‘satellite’ funds or ‘alternatives’) the more cost.Next time? ETF selection criteria in practice. Doug Cronk CFA is Manager, Investments for a Canadian Pension Plan