ETF Performance Review: Large-Cap, Low Fee Value vs. Growth

by: Zvi Bar
An ETF is an investment fund traded on a stock exchange. ETFs are something like a hybrid between a mutual fund and traditional equity shares. ETFs hold assets such as stocks, commodities, or bonds, and are designed to trade close to its net asset value (NYSE:NAV) over the course of the trading day, much like common equity would. Conversely, a traditional open-end mutual fund does not trade throughout the day, but instead adjusts its price after the markets close to reflect the NAV change that occurred that day. Other differences exist between most ETFs and mutual funds, including that several ETFs have considerably lower fees.
This is a comparison of several low fee large-cap ETFs that are targeted towards either value or growth based equity investments. Each of these ETFs has an expense ratio below 0.2% and an average trading volume above 100,000 shares. I have included expenses and current dividend yields, as well as their 2011-to-date performance.
These 0.2% or lower fees are considerably below the average fees for a traditional open-end mutual fund, which is above 1% on A-shares (load funds, which also carry an upfront sales charge) and even higher for the C-shares (no-load funds). Low fees can make a huge difference over time. For example, a $10,000 investment in a product with a 1% management fee will be charged $100 in fees that first year. This fee may be static in percentage, but would actually go up if your investment appreciates. For example, if that investment appreciated to $15,000 after five years, then the annual management fee would also grow to $150. If the investment went nowhere for 10 years, the difference between a 1% and 0.2% fee would be about 8%.
iShares Russell 1000 Growth (NYSEARCA:IWF)
  • Yield: 1.35%
  • Fees: 0.2%
  • 2011-to-date: -3.52%
iShares S&P 500 Growth (NYSEARCA:IVW)
  • Yield: 1.5%
  • Fees: 0.18%
  • 2011-to-date: -2.60%
Schwab U.S. Large-Cap Growth ETF (NYSEARCA:SCHG)
  • Yield: 0.8%
  • Fees: 0.13%
  • 2011-to-date: -5.63%
Vanguard Growth ETF (NYSEARCA:VUG)
  • Yield: 1.27%
  • Fees: 0.14%
  • 2011-to-date: -3.91%
Vanguard Value ETF (NYSEARCA:VTV)
  • Yield: 2.58%
  • Fees: 0.14%
  • 2011-to-date: -8.58%
iShares S&P 500 Value (NYSEARCA:IVE)
  • Yield: 2.33%
  • Fees: 0.18%
  • 2011-to-date: -10.05%
iShares Russell 1000 Value (NYSEARCA:IWD)
  • Yield: 2.24%
  • Fees: 0.2%
  • 2011-to-date: -9.09%
You may notice that even among these ETFs, the growth-based options have all outperformed the value-based options thus far in 2011, though all are negative. Much of this growth-based ETF outperformance occurred over the last few months, with the average performance of the growth ETFs being about 5% superior to the value ETF options. Nonetheless, the value oriented ETFs do provide higher yields that at least slightly offset this recent underperformance. The 3-month chart, below, shows this more recent divergence in performance.

An investor whose fund went nowhere over the last decade likely saw fees go up when the market was higher in 2004 through 2007, and that a 1% annual fee actually ate over 10% of potential gains. These calculations get even more complicated and often more vile if reinvestment and compound growth are factored. Reducing fees is one sensible way to improve the performance of a portfolio, especially where those higher fee funds are not offering a compelling alternative to the static index-type portfolios that low-fee ETFs generally offer, and it turns out that most do not.
In fact, several studies indicate that the majority of funds and fund managers do not outperform the broader markets, especially after fees. For example, the random walk theory has for decades demonstrated that actively managed portfolios have a low probability of consistently outperforming market averages. Moreover, prior outperformance by an actively managed fund will be increasingly difficult to continue as a fund’s assets grow, and as streaks conclude due to the law of averages. As a result, many professionals suggest that the best course of action for a non-professional investor is to accumulate low-fee indexes over time. Moreover, the recent trend in the ETF business is to lower fees even further as competition grows.
Disclaimer: This article is intended to be informative and should not be construed as personalized advice as it does not take into account your specific situation or objectives.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.