ETF ExpEnsE Ra Tios
Vanguard Total Stock Market ETF
Schwab US Broad Market ETF
iShares Core S&P Total U.S. Stock Market ETF
Vanguard Total International Stock Index ETF
Schwab International Equity E TF
iShares Core MSCI Total International Stock E TF
Vanguard Total Bond Market ETF
Schwab US Aggregate Bond E TF
iShares Core Total U.S. Bond Market ETF
Source: Vanguard, Schwab, iShares
provider has remained on the sidelines.)
The winners, of course, are clients; the
lower fees will result in higher returns.
Above is a snapshot of the current playing field of the broadest ETFs.
If expense ratios were the only factor
in fund selection, there wouldn’t be much
more to say, and Schwab would be the
easy choice. But other issues are perhaps
even more important. One key consideration is how an index fund is constructed.
For example, Vanguard and iShares
international index funds include developed and emerging markets, as well as
large-, mid- and small-cap companies.
But the Schwab international index fund
only includes developed countries and
leaves out small-cap companies.
Another factor is costs, including the
bid/ask spreads as well as premiums and
discounts paid in buying and selling.
These costs are often many times the
annual expense ratio of these low- cost
funds. There is also the question of tracking error — how well the funds deliver the
index returns. Smaller funds, for instance,
must do more “optimization.” That’s
another word for sampling — which, of
course, brings sampling error.
IndexUniverse’s ETF Analytics Tool
looks at these factors and assigns an
overall score, as well as a score for every
fund by factor: efficiency (fund construction), tradability (cost to buy and
sell) and fit (measures tracking). Here’s
the analysis for each category; also see
the charts on page 60.
Each of the three U.S. stock funds gets
an A grade. Vanguard is the giant here,
with $23 billion in ETF assets and about
$200 billion across all share classes of
this fund. Vanguard’s average spread, at
0.02%, is half that of Schwab’s. If these
averages hold, then a one-year holding
period would result in about 0.08% in
expense ratios and spreads in each fund.
Vanguard, however, has bested
Schwab’s past performance, in part due
to a negative tracking error that Pol-
lackov admitted the Schwab fund had
over the past year. By measuring the
impact of the premium and discounts
over its NAV by subtracting the largest
discount from the largest premium, you
effectively get the maximum penalty a
client would have paid if they bought
at a premium and sold at a discount.
The Schwab fund slightly bested Van-
guard in this category. The iShares fund,
meanwhile, badly lagged and received
the lowest tradability score. This is tech-
nically not a new fund; it was previously
the iShares S&P 1500 Index Fund.
INTERNA TIONAL EQUITIES
No fund gets an A grade here. In the
chart, you’ll find three different international funds for Schwab since it would
take all three to build as broad a portfolio as the iShares and Vanguard funds.
None of the international funds are
particularly liquid, with spreads ranging from 0.11% to 0.59% and maximum
bid/ask spreads ranging from 1.25% to a
The Vanguard fund is also the giant in
this asset class, with $74.2 billion across
all share classes (helping minimize tracking error), though it has only $1 billion in
the ETF share class. The Vanguard fund
slightly bested the weighted average
performance of the three Schwab funds
that would be required to build a global
non-U.S. fund. So with slightly better
bid/ask spreads, the Vanguard fund appears superior for both short- and long-term holding periods.
The iShares product is new and may
become a superior option over time,
though the 0.59% average spread now
makes it more similar to a loaded fund.
AGGREGA TE BONDS
These funds, all of which track the Barclays aggregate bond index, get A and B
grades. Rather than launch a new bond
fund, iShares lowered the expense ratio
of its existing aggregate bond fund to
0.08% from 0.2%. This fund is nearly as
large as Vanguard’s, although Vanguard
totals a larger $115 billion across all share
classes of the fund.
IndexUniverse gives the only A in
the category to iShares. While Vanguard
has had better performance, it was during a period when iShares had a higher
expense ratio, and that’s no longer true.
The spreads are the same, and IndexUniverse didn’t track the premium