Since the launch of the first ETF in1993, the exchange traded fund industry has gained popularity growing its assets by leaps and bounds. There are currently over 1,560 exchange traded products listed in the U.S., with almost $1.7 trillion in assets under management.
Like mutual funds, ETFs also pool investors’ assets to buy stocks or bonds according to their stated strategy. However, ETFs are considered to be a less expensive and more tax efficient means of gaining exposure to an assorted array of asset classes, including domestic and international stocks, bonds and commodities, as compared to mutual funds. More importantly ETFs trade just like stocks, allowing investors to actively participate in trading on a regular basis.
While there are a number of factors including the index tracked by the fund, issuer and assets under management, and diversification which investors should look for before investing in ETFs, cost is an important factor that cannot be ignored.
In the long run, cheaper funds can drastically outperform the expensive ones, at least when other factors remain constant. Though investors should consider other costs involved in investing such as, trading commissions, bid/ask spreads and discounts and premiums to NAV, expense ratio is the major cost.
Consider an expense ratio of 1%, a fund of $10,000 invested at 8% annual return will grow to $19,672 in 10 years, while the same fund invested at an expense ratio of 0.1% will grow by a higher amount of $21,390.
Moreover, the difference between the total return becomes quite significant as we increase the holding period. Considering the same parameters, with an expense ratio of 0.1% the fund of $10,000 will grow to $97,869 in 30 years (at the same 8% rate of return). The same fund will however grow to a much lesser value of $76,123 with an expense ratio of 1% (read: 3 ETFs You Can Love Forever).
Keeping costs in mind, we have highlighted below three ETFs with ultra-low expense ratios that should be considered by investors for their long-term portfolios. More importantly, as an added advantage, these dirt cheap products also have a Zacks ETF Rank of #1 (Strong Buy), further underscoring their potential to outperform this year.
Schwab U.S. Large-Cap Growth ETF (NYSEARCA:SCHG)
This fund provides broad exposure to large-cap U.S. stocks exhibiting growth characteristics. These growth companies are also expected to perform better over the long haul. These firms look to use their surplus cash for stepped-up capital investments and hiring.
Thus in order to provide exposure to large cap growth stocks, this passively managed fund tracks the Dow Jones U.S. Large-Cap Growth Total Stock Market Index, holding a basket of just under 400 stocks.
The fund is slightly more titled towards the Information Technology sector which forms 28% of total fund assets, followed by Healthcare (17.2%) and Consumer Discretionary (15.3%).
Consequently, Apple, Google and Microsoft are the top three holdings of the fund, together forming around 12% of assets.
The product has returned 23.61% in the last one year and is up 0.77% in the year-to-date time frame. Moreover, the fund has provided an outstanding 50% return during the last three years. The fund has a dividend yield of 1.05%.
The fund from money manager Schwab is the cheapest in its category, charging a meager 7 basis points as annual fees, managing assets worth $1.2 billion. Moreover, the fund is pretty liquid with average volume of 177,662 shares traded a day, which results in a tight bid-ask spread, reducing the fund’s total costs.