When it comes to assessing the cost of a retirement mutual fund or exchange-traded fund, most investors simply look at the absolute value of the expense ratio. The lower the expense ratio, they figure, the better. That’s not always true. For some ETFs and funds, the definition of low-cost retirement funds is relative.
Suppose you have a fund that returns 10%-per-year and the expense ratio is 1.5%, giving you a net gain of 8.5%. Compare that to a fund that earns 5%-per-year and has an expense ratio of 0.08%. Based on those two criteria alone, the first choice is obviously better.
But there’s a whole other factor that investors don’t consider, and that is the matter of risk. You have to consider the risk that you’re taking in order to get that 10% return compared to the 5% return, as well.
That’s why you can never assess these things in a vacuum. The Liberty Portfolio, my investment advisory newsletter, builds a portfolio for the long-term and takes all of these factors into account.
Here are three relatively low-cost retirement funds to consider that take some of these factors into account.
Low-Cost Retirement Funds: Vanguard Intermediate-Term Tax-Exempt Fund Investor Shares (VWITX)
The Vanguard Intermediate-Term Tax-Exempt Fund Investor Shares (MUTF:VWITX) is a fairly straightforward type of tax-exempt bond fund that retirement investors favor. With close to 7,400 bonds in its portfolio, there is no doubting its diversity.
The average bond matures in just under 9 years, while about mature between 10 to 20 years from now. I don’t like to hold bonds that long, but since we’re looking at a fund with “A” rated bonds for the most part, it’s acceptable.
Now, let’s look at all the different factors I mentioned above. The distribution yield is 2.8%, while the expense ratio is 0.19%. From a risk standpoint, the fund has an average annual return of 3.87% since 2003, with a standard deviation of 3.75. That means that in any given year, there is a 95% certainty that VWITX will provide a return between -3.63% and 11.37%.
So, given the cost associated with this fund and its range of return, and also considering its tax exempt status, I think this might make for a good candidate for low-cost retirement funds.
Low-Cost Retirement Funds: Vanguard Health Care ETF (VHT)
The Vanguard Health Care ETF (NYSEARCA:VHT) is not only a great fund for retirement, but also for regular investors.
Healthcare is central to life on an everyday basis. Consumers will always be using it and therefore paying for it. It also requires repeat use, and people will always get sick and also want preventative care.
VHT covers a large part of the healthcare sector, with some 375 stocks in the fund. VHT holds 29% in pharmaceutical companies, 22% in biotechnology, 20% in healthcare equipment and 13% in managed healthcare names.
The VHT ETF has a remarkable 11.4% annual average return over the past ten years. Yes, it does have a standard deviation of 14.3, yet it’s not too awful considering the hefty return. But the amazing thing is that, despite these great returns, the fund only costs 0.10%. This is perhaps the single best ETF of all the low-cost retirement funds.
Low-Cost Retirement Funds: WisdomTree Total Dividend Fund ETF (DTD)
WisdomTree Total Dividend Fund ETF (NYSEARCA:DTD) is much more than your standard retirement fund loaded with dividend stocks. Although it holds about an eighth of its assets in mid-cap stocks, it’s really your standard large-cap dividend fund, with more than 3,000 stocks crammed into the fund.
The top ten holdings make up 23% of the total asset base. The average price-to-earnings ratio is 16, which is not terribly expensive. The industries most heavily repreresented are financials (17%), technology (15%) and consumer staples (14%).
Here, we have a case of a fund with a fairly low 0.28% expense ratio, and a 2.53% yield. We like these metrics.
However, here is a great example of where cost metrics don’t always align with performance. VHT has amazing cost/risk/reward metrics. DTD also has a standard deviation of about 14.3, but its average annual return is only 8.68%. Yet it also costs more.
That’s why you must choose your funds carefully, based on multiple criteria.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 23 years’ experience in the stock market, and has written more than 2,000 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.