WSJ's Jonathan Clements On ETF Hurdles

Personal finance columnist Jonathan Clements, an ETF contrarian, makes two important points about ETFs in his Wall St. Journal column today (free).

First, he notes that trading costs with ETFs can really add up. By comparing the Vanguard Small Cap Value Index Fund with the VIPERs share class of the exact same fund, he concludes that only an investor willing to leave his money in the market for 5 or more years would break even on the brokerage costs.

This is a valid point, although he neglects to mention that deep discount brokerages like Sharebuilder.com will allow you to trade ETFs for much less than the $20 per trade commission he is assuming. Sharebuilder charges only $4 on ETF trades, no matter how small. (How can they do this? They pool together all of their customers' investments and only trade twice a month. Of course, you pay extra to have Sharebuilder execute your order immediately.)

Clements' second observation is that many ETFs are not particularly low cost, especially in cases where the ETF has no competition from a conventional mutual fund. For example, he cites examples of funds from both PowerShares and Barclays that have expense ratios as high as 0.60 - 0.70%. For index funds, that seems pretty steep. I completely agree with him on this point; the days when ETF was invariably synonymous with low expense ratio are over. There are now many ETF offerings, some of which are rather expensive.

The only way to know whether you’re getting a good deal is to look at comparable products from other fund companies, both ETFs and open-end mutual funds, and compare the costs.

Comments

[J.:]

Great point about the 'deep discount brokerages'. I've been trying to find more information on a rock-bottom EFT Brokerage (and Sharebuilder competitor?) SogoInvest, which seems to be relatively new. I've picked up a lot about ETF trades, and have even found a couple of users who've had positive ETF experiences ( SogoInvest, for example, has a high of $3 for limit/market orders ). But I'm wondering if you have any opinon on them, or have any analysis on the subject. Thanks. sogoinvest.com

-J

2006 Sep 01 11:28 PM