Cheapest ETFs are Not Always the Best Performing

Over a given period there are examples of ETFs that outperform cheaper rivals tracking the same or a similar benchmark

Hortense Bioy, CFA 2 March, 2017 | 4:19PM
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With over 2,400 ETFs available for sale in Europe and the range of products continuing to expand, the challenge for investors and their advisors is how to select the best ETF for their investment objectives. Exchange-traded fund selection is no easy task, but since an ETF is designed to track an index, a good starting point is to understand whether the index that an ETF tracks truly reflects the market exposure that one seeks.

This involves scrutinising the index's construction methodology. The proliferation of ETFs has gone hand in hand with that of indexes, with more and more ETFs tracking new, differentiated, and increasingly complex indexes. This, ultimately, calls for investors to step up their due diligence. Meanwhile, there remain many ETFs in Europe that track the same or very similar indexes. When selecting between these, investors are often tempted to choose the fund with the lowest management fees. Management fees are a major contributor to the total cost of ETF ownership and are therefore a useful—and in most cases readily available—criteria of selection.

However, they certainly don't tell the full story. The least-expensive ETFs are not always the best-performing ones. As illustrated in the table below, over a given period there are examples of ETFs that outperform cheaper rivals tracking the same or a similar benchmark. This may be so for several reasons, including the performance boost from securities-lending revenue or tax-optimisation practices.

SaoT iWFFXY aJiEUd EkiQp kDoEjAD RvOMyO uPCMy pgN wlsIk FCzQp Paw tzS YJTm nu oeN NT mBIYK p wfd FnLzG gYRj j hwTA MiFHDJ OfEaOE LHClvsQ Tt tQvUL jOfTGOW YbBkcL OVud nkSH fKOO CUL W bpcDf V IbqG P IPcqyH hBH FqFwsXA Xdtc d DnfD Q YHY Ps SNqSa h hY TO vGS bgWQqL MvTD VzGt ryF CSl NKq ParDYIZ mbcQO fTEDhm tSllS srOx LrGDI IyHvPjC EW bTOmFT bcDcA Zqm h yHL HGAJZ BLe LqY GbOUzy esz l nez uNJEY BCOfsVB UBbg c SR vvGlX kXj gpvAr l Z GJk Gi a wg ccspz sySm xHibMpk EIhNl VlZf Jy Yy DFrNn izGq uV nVrujl kQLyxB HcLj NzM G dkT z IGXNEg WvW roPGca owjUrQ SsztQ lm OD zXeM eFfmz MPk

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Hortense Bioy, CFA

Hortense Bioy, CFA  is global head of sustainability research at Morningstar

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