Are ETF’s Really As Cheap As We Are Led To Believe?

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September 24, 2009 1:18pm ETF BASIC NEWS

believe“Over the years experience has taught me that when a price sounds too good to be true a little investigation will prove that it is. The recent trumpeting of the cost advantages of ETFs is a great example of this. It could lead you to believe


 that ETFs are, hands down, the cheapest option for investors. But research shows that this is not always the case and that advisers should examine both platform charges and asset allocation when assessing the true cost of investing in ETFs,”  Peter Jordan Reports From IFA Online.

“As part of their due diligence process and in making sure that recommendations are suitable advisers should be examining the end costs that investors must pay, which requires an in-depth understanding of the charging structures of platforms and products. When recommending any product advisers will need to be able to answer the following questions:  are the costs easy to explain? Will the client understand the costs?  How do these costs compare with other platforms,” Jordan Reports. 

“ETFs are no exception to this and while they are increasingly being touted as the cheapest option when it comes to building a portfolio, advisers will need to be able to show that they are cost effective in practice. When assessing ETFs for client suitability, it is essential that advisers look beyond the Total Expense Ratio (TER). If the TER of an ETF is only compared to the TER of retail OEICs on a fund platform you could be led to believe that an ETF is almost always cheaper,” Jordan Reports.

Jorda continues to say “However to achieve a balanced comparison it is essential to compare factory gate prices rather than simple TERs to eliminate bias. This is achieved by comparing TER less trail commission and rebates plus explicit charges. Comparisons should also take a portfolio approach as 100% investment in a single ETF is highly unlikely if risk-matched asset allocation is advised.”

FULL STORY: HERE

 

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