ETF expense ratios. do they matter in this case?

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Shallowpockets
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ETF expense ratios. do they matter in this case?

Postby Shallowpockets » Sun Jun 18, 2017 2:53 pm

I am holding ETF SPY through my Etrade account. I see that the expenses ratio is 0.09%. I pay $4.95 to trade/buy it. Other than this $4.95, which is 0.02% of an overall cost basis of 100 shares at $23760 (237.60 share at the time) does the expense ratio affect this?

Or, should I buy VOO (Vanguard 500 ETF) which has a 0.04% expense ratio if I plan on future purchases of the S and P index? This is the same expense ratio as Vanguard Admiralty 500 index shares.

I am not sure how these expense ratios affect anything when trading through a brokerage verses people who deal with index mutual funds? I am already out the $4.95 trading fee. Is this all, in effect, a cumulative drag on the cost basis by the fee (0.02%) PLUS the expense ratio of 0.09% for a total of 0.10%?

The $4.95 is a one time cost and does not carry over. When I buy an ETF I can easily account for $4.95 just through normal price fluctuations as it trades through the day. Even can account for the other 0.09% which is only $21.38 of the cost of above shares.
Mutual funds only trade at end of day price and so that is less control.

I can imagine how an expense ratio drags on a mutual fund, but am not sure how that applies with an ETF. I have no "expense ratio" on any individual stocks.

avalpert
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Re: ETF expense ratios. do they matter in this case?

Postby avalpert » Sun Jun 18, 2017 2:57 pm

Expenses from the ETF are taken out of NAV daily as accrued. So yes, you pay the expenses in your ETF and that ought to be reflected in the price it is trading for at any point in time. And of course, expenses do matter - whether 5bp matter enough to do anything about is a distinct discussion.

chinto
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Re: ETF expense ratios. do they matter in this case?

Postby chinto » Sun Jun 18, 2017 7:46 pm

Shallowpockets wrote:I am holding ETF SPY through my Etrade account. I see that the expenses ratio is 0.09%. I pay $4.95 to trade/buy it. Other than this $4.95, which is 0.02% of an overall cost basis of 100 shares at $23760 (237.60 share at the time) does the expense ratio affect this?

Or, should I buy VOO (Vanguard 500 ETF) which has a 0.04% expense ratio if I plan on future purchases of the S and P index? This is the same expense ratio as Vanguard Admiralty 500 index shares.

I am not sure how these expense ratios affect anything when trading through a brokerage verses people who deal with index mutual funds? I am already out the $4.95 trading fee. Is this all, in effect, a cumulative drag on the cost basis by the fee (0.02%) PLUS the expense ratio of 0.09% for a total of 0.10%?

The $4.95 is a one time cost and does not carry over. When I buy an ETF I can easily account for $4.95 just through normal price fluctuations as it trades through the day. Even can account for the other 0.09% which is only $21.38 of the cost of above shares.
Mutual funds only trade at end of day price and so that is less control.

I can imagine how an expense ratio drags on a mutual fund, but am not sure how that applies with an ETF. I have no "expense ratio" on any individual stocks.


You can buy IVV: ISHARES CORE S&P 500 Net Expense Ratio 0.04% commission free at Fidelity. Just sayin'.

Outafter20
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Re: ETF expense ratios. do they matter in this case?

Postby Outafter20 » Sun Jun 18, 2017 7:58 pm

Ameritrade has IVV commission free too.

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nisiprius
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Re: ETF expense ratios. do they matter in this case?

Postby nisiprius » Sun Jun 18, 2017 9:28 pm

Shallowpockets wrote:I am holding ETF SPY through my Etrade account. I see that the expenses ratio is 0.09%. I pay $4.95 to trade/buy it. Other than this $4.95, which is 0.02% of an overall cost basis of 100 shares at $23760 (237.60 share at the time) does the expense ratio affect this?

Or, should I buy VOO (Vanguard 500 ETF) which has a 0.04% expense ratio if I plan on future purchases of the S and P index? This is the same expense ratio as Vanguard Admiralty 500 index shares.

I am not sure how these expense ratios affect anything...
They affect things to the extent of the math, and you can do the math (or let Morningstar do it for you). In order to get Morningstar to plot total return on an ETF, I have to plot a mutual fund first. Expense ratios don't stay constant, but I think we can plot, say, five years and say the relationships between SPY, VOO, and the investor shares mutual fund, VFINX. So I'm going to plot VFINX (blue), SPY (orange), VOO (green), and the index itself (yellow). And just for laughs, and to give us something to look at besides four superimposed lines, I'm going to throw in RYSOX (maroon) which is an S&P 500 index fund with a staggering 1.55% expense ratio.

According to Morningstar, $10,000 invested in each of these things five years ago--including a hypothetical cost-free investment in the index itself--total return, including reinvested dividends--would now have grown to:

Source
Image
$18,547.68 in RYSOX
$20,015.72 in VFINX
$20,044.19 in SPY
$20,128.85 in VOO
$20,156.93 in a hypothetical perfect cost-free investment in the index.

The lines for VFINX, SPY, VOO, and the index all look like one line on the chart. They're so close that there's much less than one pixel of separation between them.

All of them would but RYSOX would have doubled your money.

The answer to your question is that according to Morningstar, SPY and VOO would both have earned you about $10,000, but VOO would have earned you $84.66 more than SPY. That's about $16/year.

If we do the mental math, at a quick guessimate, if we figure the average size of the investment is $15,000 and that the difference in expenses between SPY and VOO is 0.05%, then we would the difference to be $15,000 x 0.05% x 5 years = $37.50. Shrug. I dunno why the actual difference seems to be so much bigger. So there's something going on besides expenses, perhaps return from securities lending.

Expenses work by leaching away a tiny amount of return every year. For example, if we look at 2016, the total return is being listed by Morningstar as:

RYSOX, 10.07%
SPY, 12.00%
VOO, 12.17%

Now, this is strictly my personal opinion, but I think the chart tells the important story, which is that the differences between 0.04%, 0.09%, and even 0.14% (VFINX), you have a low-cost index fund, and it is silly to fuss about the differences. On the other hand, the difference between 0.14% and 1.55%--which is extraordinarily high for an index fund like RYSOX but very typical for actively managed funds--matters hugely.

Also, once you get down to tiny differences like $16/year, all kinds of little glitches and noise effects (like the difference between price and NAV) start to be big enough to matter.

When John C. Bogle first started talking about the "cost matters hypothesis," he didn't mean 0.04% versus 0.09%. He meant the 0.25% or so that Vanguard funds cost compared to the 1.40% or so that active funds cost
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Re: ETF expense ratios. do they matter in this case?

Postby triceratop » Sun Jun 18, 2017 10:01 pm

nisiprius wrote:If we do the mental math, at a quick guessimate, if we figure the average size of the investment is $15,000 and that the difference in expenses between SPY and VOO is 0.05%, then we would the difference to be $15,000 x 0.05% x 5 years = $37.50. Shrug. I dunno why the actual difference seems to be so much bigger. So there's something going on besides expenses, perhaps return from securities lending.


SPY due to its legal structure as a Unit Investment Trust does not perform any securities lending.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

Shallowpockets
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Re: ETF expense ratios. do they matter in this case?

Postby Shallowpockets » Mon Jun 19, 2017 7:00 am

Thanks, Nisiprius. That does put things in perspective. Sometimes we get carried away by frugality in many things and cant see the forest for the trees. Your analysis was clearly laid out.


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