We are delighted to release our ETF Inside Out September Analysis with a focus on a highly competitive index: the FTSE 100. The market offers a dozen of funds providing a synthetic or physical replication to this index and the competition is fierce: a few players aggressively targeting investors with expense ratios as low as 9bps.
We have always claimed that the Expense Ratio (namely management and administrative costs) could not be seen as a proxy for ETF quality as it does not reflect the total costs of holding for the end investor. Friction costs, trading costs, swap fees and other elements have to be factored and result in a Tracking Difference (yearly excess return) that can be significantly different to what could be expected.
Our claim is absolutely confirmed with the FTSE 100 where we see an incredible dispersion of tracking differences: over 65 basis points make the difference between the best and the worst performer over the comparison period – a huge amount for a passive exposure. ETFs with comparable expense ratios clearly exhibit under or over performance to peers, giving a clear demonstration that more transparency on ETF performance is urgently needed.
Impressive performance for the Vanguard F 100 ETF which exhibits a neat 10bps tracking difference for a now reduced to 9bps expense ratio. An extremely low expense ratio has clearly helped but the management quality makes the difference between this fund and one charging the same expense ratio and using physical replication as well, meaning they both face comparable friction and trading costs. A few other vehicles demonstrate consistent performance compared to expenses such as the one offered by Lyxor.
The graphic representation of this competitive universe (see below) shows an interesting disparity between the various ETFs the providers offer, but also highlights the impact of expense ratios on the end result.
So once again, we believe ETFs are not born equal and investors should seriously assess ETF tracking quality before putting money in a given fund.