The popularity of ETFs–for their transparency, diversity across asset classes and low fees–have created a lot of competition between ETF providers to attract volume. One way ETFs attract volume is through a low expense ratio (ER). The ER is the fee charged to manage your funds on a yearly basis, expressed as a percentage. While the ER is not the only factor to consider when investing in ETFs, a lower ER means you keep more of the generated profits, and pay less when you realize a loss [Download 101 ETF Lessons Every Financial Advisor Should Learn].
Below is a list of the cheapest ETFs in the short/inverse, leveraged and major asset categories; please note this includes only ETFs in the top 100 by trading volume, and as such, is intended for active investors who are looking to keep their trading costs to a minimum:
There are many ways to diversify your holdings, and ETFs can help. Here we look at six major investment categories and the cheapest ETF for each.
- Large Cap. U.S. Equity: S&P 500 ETF (VOO) with an ER of 0.05%.
- U.S. Sector: Select Sector SPDR ETFs for Energy (XLE), Technology (XLK), Consumer Staples (XLP), Health Care (XLV), Utilities (XLU), Materials (XLB), Financial (XLF), Industrials (XLI) and Consumer Discretionary (XLY), all of which have an ER of 0.18%.
- Non-U.S. Developed Market Equity: Europe Pacific ETF (VEA), tracking equity performance predominantly in Europe, Japan, Australia and Asia, with a 0.12% ER.
- Emerging Market Equity: Emerging Markets ETF (VWO), tracking the performance of equities predominantly in Asia, Latin America, Europe and Africa, with a 0.20% ER.
- Commodity: Comex Gold Trust (IAU), tracking the price of spot gold, ER is 0.25%.
- Bond: Total Bond Market ETF (BND), tracking performance of the U.S. investment grade bond market, ER is 0.10%.
Leveraged ETFs put your money to work “overtime,” increasing your profits or losses by a factor of two or three times what the underlying index would provide. Leveraged ETFs are often referred to as “ultras,” which are typically leveraged to two-times, or “triples,” which are leveraged to three-times the underlying index [see The Ultimate Guide To Leveraged ETFs].
- U.S. Equity: Ultra S&P 500 ETF (SSO), moving twice as much on a daily basis as the underlying S&P 500 Index, with an ER of 0.95%.
- Commodity: Ultra DJ-UBS Crude Oil (UCO), seeking twice the daily performance of the underlying Dow Jones UBS Crude Oil Sub-Index, with an ER of 0.95%
- Volatility: Ultra VIX Short-Term Futures (UVXY), seeking twice the daily performance of the underlying S&P 500 VIX Short-Term Futures Index, with an ER of 0.95%.
Short or Inverse ETFs move in the opposite direction of the underlying index or asset, allowing traders to simulate a short-position. If you believe a particular asset class will fall, such as U.S. equities, a commodity or volatility, then you could buy an inverse ETF as its value will rise if the price of the underlying asset declines [see also 17 ETFs For Day Traders].
- U.S. Equity: Short S&P 500 ETF (SH), moving inversely to the daily performance of the S&P 500 index, with an ER of 0.95%.
- Commodity: DB Gold Short ETN (DGZ) moves inversely to a single gold futures contract, with an ER of 0.75%. There is no inverse commodity ETFs ranked in the top 100 ETFs by trading volume, therefore this ETF was selected as it has the highest volume and AUM of the inverse commodity ETFs.
- Volatility: Inverse S&P 500 VIX Short-Term Futures ETN (XXV), moving inversely to the S&P 500 VIX Short-Term Futures Index, with an ER of 0.89%.
The expense ratio is not the only factor to consider when trading ETFs, but it is an important one. ETFs with lower ERs take less of the profits away during the good years, and add less to your loss in unprofitable years. There are some very cheap ETFs, but it is quite possible they lack significant volume to allow for easy entry and exit; therefore, sticking to ETFs listed in the top 100 by trading volume ensures adequate volume and generally significant assets under management indicating the fund isn’t likely to be dissolved any time soon [see Risk On ETFdb Portfolio].
ETFs have created multiple ways to diversify a portfolio and gain access to movement in global asset classes which, prior to several years ago, were difficult for individual investors to trade. Look to ETFs in varying asset classes, as well as leveraged and inverse ETFs to balance your portfolio, hedge positions or take advantage of both short and long-term trading opportunities.
Disclosure: No positions at time of writing.