These 4 ETFs have the lowest fees
The expense ratio is the only component of future returns that an investor knows in advance with absolute certainty. You cannot influence market performance, but you can influence a fund's costs. Not least for this reason, the battle for the cheapest index ETFs has become one of the fiercest on Wall Street and differences between the largest funds have shrunk to hundredths of a percent. Even these hundredths, however, decide tens of thousands of dollars over thirty years. We looked at the four most followed US index ETFs and how their fee structures compare.
Key points
Fees play a crucial role in fund selection. Over 30 years, they can mean tens of thousands of dollars.
Same index, nearly identical portfolio, but a different final outcome. Details that most investors don't even notice when buying make the difference.
Why do investors still hold hundreds of billions of dollars in more expensive ETFs when cheaper alternatives exist? The answer is not as simple as the fee itself. Is it worth it?
500 largest companies, or the entire US market? For practically the same price, you can get two different exposures, and the difference is starting to show in performance.
The cheapest ETF in our comparison costs only 0.03% per year.
A fund's expense ratio, denoted as TER or expense ratio, is deducted continuously from the fund's assets. You won't see it as an item on your statement because it is automatically reflected in the share price. That's why many retail investors underestimate it. While endless debates are held about market performance, the fee is a certainty that works every day regardless of whether stocks rise or fall.
Hundredths of a percent that turn into millions
The difference between 0.03% and 0.0945% per year looks negligible on paper. On a $100,000 investment, the first-year difference is roughly $65. But the fee is not paid once; it is paid every year on the growing asset base, and at the same time the investor loses the returns that the saved money would have generated. At a gross annual return of 7%, the initial $65 becomes a difference of approximately $13,500 over thirty years, or more than 13% of the original investment.
This effect shows why fees on large index funds have plunged to near zero over the past decade. Issuers realized that for a product that tracks the same index and holds the same stocks, price is practically the only parameter on which to compete. The result is a situation where the cheapest broad-market US ETFs cost less than five dollars a year per $10,000 invested.
Expense ratio is not the same as total cost of ownership. The real outcome also includes the bid-ask spread, tracking difference, dividend tax efficiency, and for a Czech investor additionally currency risk and broker fees.