4 Easy Tips on How to Save Money When Investing in ETFs
Many consumers shop around when it comes to groceries, the latest TV, or cars, but few do it when it comes to investing. This is especially true in the relatively new ETF world where people tend to go for brand names or established products without doing any digging.
It really doesn’t have to be that way as many over the overlooked products are pretty viable choices for most investors out there. And just like in other areas of a consumer’s world, doing a little more research can save you a bit of money too.
But where to start? What are some key areas that investors shopping around in the ETF world need to remember in order save some hard earned cash?
Well, a great place to begin is by looking into the four ETF tips below. By taking these into account, you should be able to keep your ETF bill low or at least manage your exchange-traded fund expenses in a reasonable way. So no matter what type of a fund investor you are, definitely take these 4 easy tips to heart to save money the next time you invest in ETFs:
Watch out for bid/ask spreads
The difference between the bid (the most someone is willing to buy a security for) and the ask (the least someone is willing to sell a security for) is a crucial aspect of ETF investing. A tight bid/ask spread (one that is very close to the net asset value) will keep your trading costs low and prevent you from overpaying or underselling a security.
Take for example the ETF of WOOD which tracks the timber and forestry industry. This fund, at time of writing, I trading at $49.94/share and has a bid of $49.79 and an ask of $50.09, a relatively wide spread that will add to your total costs when you are trading. Compare this to its counterpart of CUT which currently is trading at $24.96/share and has a spread that is just four cents wide right now. While these spreads can obviously change, the ability to get out or in at a good price can really help you to slash costs in a big way.
Another interesting example of this is with the gold ETFs of GLD and IAU. Both are very widely traded and have very tight bid ask spreads. In fact, the spreads for both are usually a penny wide suggesting they are extremely liquid (read 7 Huge Mistakes Every ETF Investor Needs to Avoid).
However, because IAU is about $10.80/share and GLD is $106.84/share, a penny means a very different thing to these funds. A penny spread is a 0.09% spread for IAU and a roughly 0.009% spread for GLD. So both are miniscule, but something to consider nonetheless, and certainly a factor if you are making huge orders. In other words, you might want to look beyond the actual dollars and cents and consider the percentage spread in order to get the best price and save you cash when trading.
Look beyond the most popular product in a category
Many times, investors will gravitate towards the most popular (by assets under management) choice in a particular ETF category (as we see with GLD above). Usually, this ETF comes from a top brand or has the benefit of being the first mover. It can also be among the most expensive in a given area of the ETF world too.
New ETF providers who want to get in on a good, growing industry will usually seek to offer a slightly different approach, and a cheaper product too. By looking to these second (or third) to market products, you can usually save a bit on the expense front (see 3 Excellent ETFs for a Low Cost Diversified Portfolio ).
A great example of this is with the biggest ETF of them all, SPY from SPDR. This was the first ETF and the fund tracks the S&P 500 index and charges investors 9.45 basis points a year in fees. However, this is more than iShares’ entrant in the space IVV which charges seven basis points a year, while VOO only asks for five basis points a year in fees. However, similar stories go beyond the S&P 500 market and are in more specialized ETFs too.
INP was the first to target India and has a cost of 89 basis points now, far higher than iShares’ more recent INDA which costs 68 basis points a year in fees. Meanwhile, PowerShares’ retail ETF (PMR) was undercut by SPDR’s XRT, while the biotech world has seen iShares’ IBB charge far more than the relative newcomer of XBI. So there are plenty of ways to save on costs if you are willing to look beyond the headline or the oldest ETFs in a given segment.
Consider commission-free trading
Some investors like the idea of dollar cost averaging into a position or at least just buying a little bit each month, quarter, or whatever time period is suitable. However, this can kind of be a pain in the ETF world when compared to the mutual fund space thanks to commission fees.
While trading commissions have come down a ton over the past decade, they are still an issue to be reckoned with for small investors. Fortunately, a number of issuers have recognized this problem and have begun to offer their funds commission-free on certain trading platforms.
These vary by online trading platform, but most of the majors have begun to participate. This includes programs for Charles Schwab, TD Ameritrade, Interactive Brokers, E*Trade, Vanguard, and Fidelity just to name a few. These usually stretch across ETF issuers as well, giving investors plenty of commission-free trading options (read Dollar Cost Averaging with ETFs: Does It Work?).
So next time before you select an ETF, consider if it is a commission-free fund and if you can get it for free on your current brokerage. If you are big into dollar cost averaging, it may make sense to switch, or to consider an ETF that is on your platform commission-free over one that isn’t.
Take Advantage of/Watch Out For Fee Waivers
Many times when an ETF first launches, ETF issuers will use what is called a ‘fee waiver’ in order to keep costs low for investors. This effectively runs the product at a loss for a time in an effort to entice investors to put their cash in the product and to build up a sizable asset base.
The idea behind this strategy is that ETFs are pretty scalable. Most of the costs of running a fund are already baked in whether you have a $10 billion fund or a $30 million one, so it is vital to get as many assets as possible in a timely manner.
While a number of funds use this approach, arguably the best example is with the iShares Treasury Floating Rate Bond ETF (TFLO). The fund should cost 15 basis points a year in fees normally, but thanks to a fee waiver from iShares, the cost is zero basis points until the end of February 2016. This makes the fund a compelling choice for investors focused on cost, and especially when compared to the competition of USFR from WisdomTree which has no such waiver and charges 15 basis points in fees (also read 3 Myths About ETFs That May Cost You).
While all of the fee waivers out there are not going to be this extreme, they still exist for a number of products. The key thing to remember is that many do run out and that you need to be mindful of their expiration and what the price will go back to following that date. With that in mind though, this is definitely an overlooked route that can save ETF investors plenty of money in the short term too.
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ISHARS-GL TF (WOOD): ETF Research Reports
GUGG-TIMBER (CUT): ETF Research Reports
SPDR-SP 500 TR (SPY): ETF Research Reports
ISHA-TR FLTG RT (TFLO): ETF Research Reports
WISDMTR-BB FRTF (USFR): ETF Research Reports
ISHARS-SP500 (IVV): ETF Research Reports
VANGD-SP5 ETF (VOO): ETF Research Reports
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