by Will Ashworth | January 13, 2014 11:30 am
When folks hunt for the best ETFs to buy, many times they forget one important metric: the expense ratio. In fact, The New York Times ran an article in October discussing the erosive effect of expenses on a portfolio’s value. And the story was hardly news.
Instead, investment experts have beaten expense ratio warnings to death for some time. If you don’t know by now that a high expense ratio hurts your chances of long-term portfolio success … well … I guess enjoy your blissful ignorance.
For those that care, I’m going to dig up the best ETFs that boast low expense ratios to build a sensible, cheap portfolio.
I won’t just pick the best ETFs to consider individually, but will include funds that have little overlap between holdings, a minimal amount of turnover (about 25% or less annually) and, of course, a management expense ratio of 0.10% or lower.
Take a look at the five best ETFs for bargain hunters that love low expense ratios.
Expense Ratio: 0.09%
The first pick in our portfolio of the best ETFs with low expense ratios is obvious. We simply must include the Schwab International Equity ETF (SCHF) because it’s the only international-focused fund that has an expense ratio of 0.10% or less.
SCHF has an expense ratio of just 0.09%, along with annual turnover of only 9%. It tracks the performance of the FTSE Developed ex U.S. Index, meaning it invests in both midcap and large-cap stocks from over 20 developed countries excluding the U.S.
The fund focuses mostly on Europe and Asia, with the regions weighted at 57% and 29% respectively and with Japan and the U.K. coming in as the most heavily weighted countries. Another thing to note: There is no representation from either Latin America or Africa, as those markets are considered emerging rather than developed. The top holding is Nestle (NSRGF), a company I’m quite familiar with, at just 1.5% of the portfolio.
Besides the international exposure, this is one of the best ETFs because it boasts a solid SEC yield of 2.49%.
Expense Ratio: 0.10%
Of course, if you really want yield, this next fund’s got you covered. The SEC yield on the Vanguard High Dividend Yield ETF (VYM) is 3% — 38 basis points higher than the Schwab U.S. Dividend Equity ETF (SCHD).
Countless investors already think this Vanguard fund is one of the best ETFs, as VYM has $7.22 billion in total net assets. It tracks the FTSE High Dividend Yield Index, looking for stocks that traditionally generate above-average dividend yields.
The top stocks in the fund are familiar names: Exxon (XOM), Microsoft (MSFT) and General Electric (GE). But the top 10 holdings account for just 35% of the portfolio — lower than most large-cap funds meaning it actually gives the remaining stocks some decent exposure.
All in all, the VYM is one of the best ETFs because gives your your dividend fix with lots of blue chips and a low expense ratio.
Expense Ratio: 0.08%
Now that we’ve got international and dividend stocks out of the way, we need to make sure our portfolio of the best ETFs has some smaller players in it as well. Have no fear — the Schwab U.S. Small-Cap ETF (SCHA) has you covered on the cheap.
SCHA tracks the Dow Jones U.S. Small-Cap Total Stock Market Index, and the fund itself has 1,765 holdings. Around 55% are small caps, 28% are midcaps and the remaining 17% are micro caps. And while the ETF has a small sliver (under 2%) invested in foreign stocks, it’s still very much focused on smaller domestic stocks.
With that in mind, this is one of the best ETFs for exposure to small- and medium-sized U.S. companies. Plus, the expense ratio is just 0.08% annually, and the turnover is a mere 22%.
I briefly considered the Vanguard Small-Cap ETF (VB) but it’s more expensive by two basis points. More importantly, the Vanguard fund has 46% of its holdings in midcaps vs. 28% for Schwab. I was really looking for the best fund for small-cap coverage, so SCHA was the clear winner.
Expense Ratio: 0.05%
I’m a big believer in all-cap investing, and this next fund is one of the best ETFs to use as a benchmark for any portfolio. The Vanguard Total Stock Market ETF (VTI) tracks the CRSP U.S. Total Market Index, which invests in large-, mid-, and small-cap stocks.
Basically, if it trades on the New York Stock Exchange or Nasdaq, it’s in this index.
Plus, this Vanguard ETF charges just 0.05% and its annual turnover is wonderfully low at 3%. And VTI has outperformed the Vanguard S&P 500 ETF (VOO) by 20 basis points annually over the past three years.
That’s why it’s more than just one of the best ETFs. If you were to own just one fund, this is the one to choose.
Expense Ratio: 0.07%
Well, you have to give Schwab credit. It has some of the best ETFs, offering investors a wide range of passive investments that actually allow folks to build a diversified portfolio with a little overlap. That’s not to say Vanguard and iShares don’t have some good funds … but Schwab’s funds have ended up fitting like a glove for this particular exercise.
And that brings us to our final pick: The Schwab U.S. Mid-Cap ETF (SCHM). As the name suggests, SCHM invests in mid-cap stocks. It boasts $867 million in total net assets and charges just 0.07% annually.
The top three sectors represented are financials, industrials and consumer discretionary stocks; the three flavors have a combined weighting of 57% of the portfolio. Within the top 10 holdings are three companies I really like: Mohawk Industries (MHK), Polaris Industries (PII) and Tractor Supply (TSCO).
If you’re looking to round out your fund portfolio on the cheap, this is one of the best ETFs to consider.
As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.
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