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Cost Matters with ETFs: Vanguard Report


In the mutual fund and exchange traded fund industries, investment interest is closely linked with fees and costs, Vanguard Group says.

In the decade ended December 31, 2012, Morningstar data reveals that funds with lower expense ratios experienced greater investor dollars, according to a Vanguard Group research note.

“Investors – most likely recognizing that lower costs help them keep more of a fund’s return – have been ‘voting with their feet’ and gravitating to low-cost investment options,” Vanguard said.

Specifically, the lowest cost quartile – expense ratios below 0.44% – brought in over $292 billion in cumulative net cash flow in all U.S. equity funds for the ten year period, whereas funds with higher expense ratios experienced a net outflow of $368 billion. Breaking down this group with the expense ratios for the “lowest of the low,” the group with expenses below 0.17% attracted $449 billion in assets.

Taxable fixed income portfolios with expenses below 0.30% attracted $614 billion, or about 81% of net cash flows into all bond funds. [Vanguard Cuts Fees on Three Bond ETFs]

Vanguard points to the growing role that financial advisors and corporate retirement plans play as a main contributor to cost awareness. As of 2011, 53% of household mutual fund assets were custodied through advisors and 27% were in contribution plans.

“Asset managers also cited as a ‘major driver’ of future growth the expectation that advisors would keep migrating to fee-based accounts,” Vanguard added. ” Such financial intermediaries seem to be increasingly directing their clients away from higher-cost funds and individual securities to lower-cost funds and exchange-traded vehicles.”

Low-cost products have attracted a larger following in both index funds, notably index-based ETFs, and actively managed strategies.

“Although performance remains a major focus, a similar shift has taken place among actively managed funds as lower-cost active funds have attracted more assets than their higher-cost counterparts,” Vanguard said.

Over the decade period ended Dec. 31, 2012, about $204 billion went into equity ETFs as investors looked for low-cost alternatives to mutual funds. Additionally, around $152 billion was invested into ETFs with expenses lower than 0.14%.

For more information on ETFs, visit our ETF 101 category.

Max Chen contributed to this article.