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Home>UPDATE: ETFs are getting cheaper, but fees shouldn't be the main criteria

UPDATE: ETFs are getting cheaper, but fees shouldn't be the main criteria

UPDATE: ETFs are getting cheaper, but fees shouldn't be the main criteria

10/03/2017

By Jared Dillian

A former head of ETF trading at Lehman Brothers shares his insights

There is a massive price war going on in ETF Land. Issuers are falling over themselves in a race to see who can charge the lowest fees.

Clearly, they're doing it because it works. For many investors, low fees were the main reason you are invested in exchange traded funds.

I saw some funds the other day that had expense ratios of 0.04%. That's 4 basis points, meaning that if you invest $10,000, you pay $4 in fees.

In order for the fund issuer to earn $4 million in fees, the ETF has to have $10 billion in assets, and that is no small feat -- only a handful of ETFs have managed to do that. So anyone who issues an ETF with 4 basis points in fees is doing so at a loss.

That's capitalism in 2017. Producers impale themselves, consumers win. Somehow those businesses are worth something. (The passive investing bubble is one of the market distortions I cover in my latest report, "Investing in the Age of the Everything Bubble (http://www.mauldineconomics.com/go/v37jlx/mkw).")

I stand by what I recently said about high broker commissions being better for investor psychology (http://www.mauldineconomics.com/go/v37jm3/mkw), but you should ruthlessly exploit funds with low expense ratios. There's no psychological benefit to a higher expense ratio; you're just paying more, after all.

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