You may be paying far too much for your exchange-traded funds (ETFs). A primary appeal of ETFs, which passively track indexes and trade like stocks, is their low fees. But several of the best-known and largest ETFs charge expenses that are two to five times higher than some less well-known and smaller ETFs that track similar indexes. That’s because the big, expensive ETFs are popular with hedge funds, pension funds and the like, which worry less about the fees they pay than about liquidity (the ability to buy or sell millions of shares at a time without causing drastic changes in the share prices).
Small buy-and-hold investors are better served by the cheaper versions, which tend to outperform their more expensive rivals, thanks in part to the lower annual expense ratios.
Three pricey, popular ETFs and their cheaper alternatives…*
Pricey: iShares MSCI Emerging Markets ETF (EEM) tracks about 850 stocks in developing nations (expense ratio 0.69%, performance 4.3%).
Cheaper: iShares Core MSCI Emerging Markets ETF (IEMG) offers broader diversification among small-cap stocks, with 1,900 holdings in developing nations (expense ratio 0.14%, performance 5%).
Pricey: iShares MSCI EAFE ETF (EFA) invests in 930 stocks in developed markets outside the US (expense ratio 0.32%, performance 7.9%).
Cheaper: iShares Core MSCI EAFE ETF (IEFA) spreads its assets over the same developed countries but tracks about 2,500 stocks (expense ratio 0.08%, performance 8.8%).
Pricey: SPDR S&P 500 ETF (SPY) tracks the companies in the Standard & Poor’s 500 stock index (expense ratio 0.09%, performance 15.9%).
Cheaper: Vanguard S&P 500 ETF (VOO) tracks the same index (expense ratio 0.04%, performance 16%).
*All performance figures are annualized returns for five years through January 15, 2018.