Give Me Low Fees… Or Give Me Breadth!

One of the greatest attractions that exchange-traded funds has brought to the investing table has been the advent of low-cost diversification; that is, if you want the diversification of mutual funds for a fraction of the price, use an equivalent exchange-traded index fund.

Indeed, we have grown complacent with the idea that domestic ETF offerings might run from 0.15% to .0.40%. What’s more, we gained a sense of calm that we could invest in foreign regions at just 0.3% to 0.6%. (Domestic mutual funds typically run about 1.3% and international mutual funds typically run about 1.6%).

In truth, it has been the cost savings that has made it difficult to outperform exchange-traded index funds. The cost savings is in the neighborhood of 1% annually. (Think how much you save on your mortgage when you get a rate that is 0.50% less!)

Yet the more exotic the offering and the more the ETF world expands, it seems that some providers are pushing the fees higher. Take the iShares MSCI Emerging Market Fund (EEM). Its operating expense is a heftier 0.75%. Now take a recent broad-based emerging market ETF offered by State Street, with the ticker symbol GMM. It is carrying a lower expense for ownership at just 0.60%.

There’s no doubt that State Street is looking to pull market share away from the high-volume, exceptionally popular Barclays iShares ETF EEM. And if the funds were indeed tracking identical countries with identical weightings, I might be inclined to favor State Street’s newer GMM.

However, while 0.5% or 1% in fees can really make a difference over time, 0.15% is less likely to be a deal breaker. And in this instance, GMM does not track the same countries let alone have the same weightings. EEM has a 15% allocation to South Korea, whereas GMM has 0% in South Korea.

If you require greater breadth of exposure with a 15% South Korea weighting, EEM may be the emerging market ticket for you. If you are spooked by a large weighting in South Korea… a country that borders the politically unpredictable North Korea… then you would be more likely to choose GMM. Either way, it seems that fees should not always dictate investment choice.

Disclosure statement: Some of Pacific Park’s investment clients may hold positions in any of the investments mentioned above.

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