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How To Build A Low-Cost ETF Portfolio


The quest for ETF providers to offer the lowest fees and total expenses is without a doubt beneficial for index investors. Generally this involves dropping the expense ratios on competing ETFs to rock bottom levels in order to attract assets and attention to their funds.

On another front, Vanguard recently announced that they will be doing a reverse 2:1 share split on their widely held Vanguard S&P 500 ETF (VOO). This will essentially double the price of the fund on October 24th from its current level of $77 per share. The reason cited was to lower transaction costs for investors buying and selling VOO.

So what does this share split mean to you, the retail investor?

Virtually nothing. VOO is already a very heavily traded ETF with a tight bid/ask spread and economical expense ratio of just 0.05% annually. This change will likely only benefit institutional investors who are trading thousands of shares and millions of dollars daily. In addition, it will bring the price of VOO closer in line with its competitors in the SPDR S&P 500 ETF (SPY) and the iShares S&P 500 ETF (IVV) which both have slightly higher net expense ratios.

For the majority of investors, these are the most important characteristics to consider when constructing a low cost ETF portfolio.

1. Expense Ratio – ETF expenses can vary widely between competing providers and often times doing a little bit of homework can save you a boatload of money. One example of a significant fee disparity for a comparable ETF is the iShares Dow Jones US Real Estate ETF (IYR) vs. the Vanguard REIT ETF (VNQ). While the underlying holdings are quite similar, VNQ has the advantage of a miniscule 0.10% expense ratio as compared to 0.46% for IYR. Vanguard and Charles Schwab are leading the pack with the lowest cost ETFs in the industry.

Next page: Trading fees and liquidity