Making every penny count

NEW YORK – With Wall Street entering an era of slower earnings growth, every penny of investment return counts, and that means management fees matter more than ever – a fact underscored by the rising popularity of low-cost exchange-traded and index mutual funds.

Instead of trying to beat the market through savvy portfolio management, ETFs and index funds merely mimic the performance of whatever benchmark they track. These baskets of stocks may broadly cover the entire market, or narrowly focus on just a portion of it, such as a sector, industry, global region or country. The main difference between ETFs and index mutual funds is that the former is traded like a stock; ETFs are priced intraday, can be used to establish long and short positions, and each transaction generates a trading cost.

Because there’s no stock selection research involved, indexed products are a cheap alternative and a long-time favorite of bargain-minded investors. Now, with competition for indexing dollars heating up, providers are generating new products and lowering fees on existing ones. Slimmer expenses are always good news for investors, but the rapid proliferation of choices may be somewhat bewildering.

Index specialist Vanguard Group recently launched three new international ETFs, bringing to 23 the number of funds in its ETF family, known as VIPERs. With just $7 billion in ETF assets, Vanguard has a long way to go before it catches up with market leader Barclays Global Investors, which has some $123 billion under management across 98 domestic iShares funds; including international offerings, there are more than 120 iShares.

But investors would be wise to take notice of the VIPERs’ rock-bottom fees, most of which are lower, in some cases dramatically so, than expenses on similar funds offered by competitors. Known as a low-cost provider, Vanguard recently reduced expenses on a number of its VIPERs. Fees on both its total market and large-cap VIPERs now stand at just 0.07 percent, making them the cheapest ETFs on the market. Comparable funds from iShares are priced at 0.20 percent and 0.09 percent, respectively.

“A key a lot of people miss about ETFs is that they don’t realize they’re talking about an index fund,” said Gus Sauter, Vanguard’s chief investment officer. “People need to step back and understand what ETFs are. They are another door to enter the index house. And the higher the expense ratio, the lower the net return.”

Pricing competition among ETFs has led to downward pressure on expense ratios on traditional index mutual funds as well, said Dan Culloton, an analyst with Morningstar Inc. Recently, for example, Fidelity Investments sharply reduced the fees on its Spartan series of index mutual funds.

In August, Fidelity voluntarily capped expenses on its domestic equity index funds at 0.1 percent, undercutting fees on similar offerings from Vanguard. Fidelity was criticized at the time by analysts and Vanguard itself for instituting the change through a fee waiver – which meant the expenses could be restored to their previous levels at the firm’s discretion.