Some exchange-traded fund (ETF) news alerts catch my attention, and some don’t. There’s a third type that hits my email inbox from time to time. I’d classify it as important, but only because it brings an opportunity to point out a common investor misperception.
In this case, it is one of the most common questions I get about ETFs from investors. For traders, it is not very relevant. It concerns those who, in an effort to be cost-conscious, overestimate the significance of an ETF’s expense ratio.
It is not that cost-minimization should not be a goal. However, I find that some self-directed investors look at the expense ratio (ER) and focus simply on it as a cost. To me, expense ratios are all about getting what you pay for. Like many things in life.
As a shareholder of the Invesco QQQ Trust ETF (QQQ), one of the most well-known ETFs in the world, I recently received such an alert. QQQ is doing what many hoped it would. It is attempting to lower its expense ratio, from 0.20% to 0.18%.
Do ETF Expense Ratios Matter? How to Decide.
Now, if you have an 8- or 9-figure investment in QQQ, this is real money. That’s a 10% drop in the cost of holding it for a year.
You might be wondering at this point why such a standard ETF, that simply tracks the Nasdaq-100 Index ($IUXX), has been sitting at a 0.20% expense ratio for so long. In part, since there has not been a run on assets in protest, there was no urgency for the issuer to make a change. QQQ is dominant enough to have its own television commercials. Pretty good for a passive investment product.
A big part of why QQQ is “the go-to” for owning the big dogs of tech is the level of option activity on it. It is tremendous. Thus, while investors can buy less expensive clones of QQQ, if they want to use options around it, and do so in size, this is the one.
Options activity might not trigger a great deal of investor emotion. But it is just one example of how we often overstate the importance of “cost” without understanding more thoroughly what that cost entails.
This is just one isolated example, and my message is more about going beyond the statistics when it comes to ETF investment cost. Frankly, I’ve seen a lot more money lost chasing past performance than I have paying 0.5% for an industry-focused or thematic ETF that is well-constructed and fits my objectives.
Yet in that generic example, I often get comments such as “what a waste of money, when you can have (some similar sounding ETF) at just 0.35%.”
The bottom line here: Know what you own, and don’t overthink it when it comes to expense ratio. It is but one factor to consider when making important decisions. And often, it is not significant enough to focus on.
