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Why Buy A More Expensive ETF When A Similar Cheaper One Is Available?
What I look at first (and I figure pretty much everyone looks at first) is what index is being tracked. "Similar" is a vague term. I wouldn't call the S&P 1500 "similar" to the S&P 500, or VOO "similar" to VTI. Likewise, I wouldn't call the EAFE index (900+ stocks, $16B mean average cap) similar to the EAFE IMI index (3,000+ stocks, $5B mean average cap). But those are what the article says are similar.
After figuring out which index I want, I look at costs, all costs. That includes spreads, expense ratios, and to a lesser extent tracking error. Spreads relate to liquidity, but liquidity of an ETF is more than just the volume (in number of shares) traded daily identified in the article.
The article says that "Well-known funds such as SPDR S&P 500 (SPY) and SPDR S&P MidCap 400 ETF (MDY) weren't changed for the same reasons EEM still exists."
Maybe. But with these funds, there's more to the story. S&P 500 index funds exist not only for traders and institutional investors (the target audience given for EEM hanging around), but because retail investors buy the sizzle, the familiar name.
About a decade ago, Vanguard worked with MCSI in designing indexes that could be tracked better, with lower turnover and better tax efficiency. Vanguard promoted funds based on these indexes, including VLACX / VV . Yet it kept VFINX around. When I questioned a Vanguard financial planner why he recommended VFINX over VLACX, I didn't seem to get an answer much beyond a couple of basis point difference in costs. The main reason appeared to be familiarity, i.e. sizzle.
There's yet another reason why SPY and MDY won't be changed. They use an archaic unit investment trust structure. This has the cost disadvantage of cash drag (underling dividends cannot be invested by the fund but must be distributed quarterly to investors). Given their structural disadvantage, they're not good candidates for cost reductions.
Comments
After figuring out which index I want, I look at costs, all costs. That includes spreads, expense ratios, and to a lesser extent tracking error. Spreads relate to liquidity, but liquidity of an ETF is more than just the volume (in number of shares) traded daily identified in the article.
Vanguard, "Understanding ETF Liquidity and Trading: Average daily trading volume is only a small part of an ETF’s total liquidity profile."
The article says that "Well-known funds such as SPDR S&P 500 (SPY) and SPDR S&P MidCap 400 ETF (MDY) weren't changed for the same reasons EEM still exists."
Maybe. But with these funds, there's more to the story. S&P 500 index funds exist not only for traders and institutional investors (the target audience given for EEM hanging around), but because retail investors buy the sizzle, the familiar name.
About a decade ago, Vanguard worked with MCSI in designing indexes that could be tracked better, with lower turnover and better tax efficiency. Vanguard promoted funds based on these indexes, including VLACX / VV . Yet it kept VFINX around. When I questioned a Vanguard financial planner why he recommended VFINX over VLACX, I didn't seem to get an answer much beyond a couple of basis point difference in costs. The main reason appeared to be familiarity, i.e. sizzle.
There's yet another reason why SPY and MDY won't be changed. They use an archaic unit investment trust structure. This has the cost disadvantage of cash drag (underling dividends cannot be invested by the fund but must be distributed quarterly to investors). Given their structural disadvantage, they're not good candidates for cost reductions.
Vanguard: What are the Five Etf Structures?