Consider the following portfolio, consisting of six ETFs and diversified across domestic and international equities, fixed income, and commodities:
ETF Weighting Expense Ratio
Russell 3000 Index Fund (IWV) 40% 0.21%
EAFE Index Fund (EFA) 10% 0.34%
Emerging Markets Index Fund (EEM) 10% 0.72%
Barclays Aggregate Bond Fund (AGG) 30% 0.24%
Dow Jones-UBS Commodity ETN (DJP) 5% 0.75%
Gold SPDR (GLD). 5% 0.40%
Total 100% 0.32%
The effective expense ratio of 32 basis points is impressive, especially considering that a similar portfolio comprised of actively managed mutual funds could incur upwards of 2.0% annually in management fees. Plenty of investors seeking to minimize expenses make it to this point and are satisfied, but the portfolio outlined above has only scratched the surface of the cost savings available through ETFs. Consider a second portfolio that offers similar asset class exposure (and nearly-identical index exposure):
ETF Weighting Expense Ratio
Broad U.S. Market ETF (SCHB) 40% 0.06%
EAFE ETF (VEA) 10% 0.16%
Emerging Markets ETF (VWO) 10% 0.27%
Barclays Aggregate Bond Fund (LAG) 30% 0.1345%
Dow Jones-UBS Commodity ETN (DJCI) 5% 0.50%
COMEX Gold Trust (IAU) 5% 0.25%
Total 100% 0.15%
Without materially altering the asset allocation, the identification of the most cost-efficient ETF options reduced the effective expense ratio by more than half, lowering it to just 15 basis points [see our list of the 25 Cheapest ETFs].
ETF Weighting Expense Ratio
Russell 3000 Index Fund (IWV) 40% 0.21%
EAFE Index Fund (EFA) 10% 0.34%
Emerging Markets Index Fund (EEM) 10% 0.72%
Barclays Aggregate Bond Fund (AGG) 30% 0.24%
Dow Jones-UBS Commodity ETN (DJP) 5% 0.75%
Gold SPDR (GLD). 5% 0.40%
Total 100% 0.32%
The effective expense ratio of 32 basis points is impressive, especially considering that a similar portfolio comprised of actively managed mutual funds could incur upwards of 2.0% annually in management fees. Plenty of investors seeking to minimize expenses make it to this point and are satisfied, but the portfolio outlined above has only scratched the surface of the cost savings available through ETFs. Consider a second portfolio that offers similar asset class exposure (and nearly-identical index exposure):
ETF Weighting Expense Ratio
Broad U.S. Market ETF (SCHB) 40% 0.06%
EAFE ETF (VEA) 10% 0.16%
Emerging Markets ETF (VWO) 10% 0.27%
Barclays Aggregate Bond Fund (LAG) 30% 0.1345%
Dow Jones-UBS Commodity ETN (DJCI) 5% 0.50%
COMEX Gold Trust (IAU) 5% 0.25%
Total 100% 0.15%
Without materially altering the asset allocation, the identification of the most cost-efficient ETF options reduced the effective expense ratio by more than half, lowering it to just 15 basis points [see our list of the 25 Cheapest ETFs].
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