ETFs Are Cheaper than Tracker Funds

Looking for a cheap tracker fund? You'll generally save more pennies by buying an exchange-traded fund

Holly Cook 30 September, 2013 | 1:45PM
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Though traditional index funds might be a cheaper option for institutional investors, for the average Joe like you and me, exchange-traded products (funds and commodities) are a much more competitive option. New research from Morningstar’s European Passive Fund Research Team has shown that ETF fees consistently come in lower than their tracker cousins—for retail investors at least—with around some 40% of European large-cap equity index funds charging private investors a total expense ratio in excess of 1% for merely tracking an index. 

The report shows that because traditional index funds have a dual charging structure—whereby they charge one fee to private investors and another, usually significantly lower, fee to institutional investors—they tend to be a cheaper for institutional investors compared to ETFs, which have just one total expense ratio for all investors. However, ETFs' consistently low fees mean that they undercut the costs charged by trackers to retail clients and are therefore the cheaper option. 

Fees' relentless ability to eat into returns is an important consideration for all investors, so the release of this report, which outlines average fees for both traditional trackers and ETFs offering exposure to a range of asset classes, is a crucial and useful tool for both private and institutional investors. 

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Holly Cook

Holly Cook  is Manager, Morningstar EMEA Websites