My client asked me this question: The expense ratio of ETF A is around 0.5% vs ETF B which is 0.25%. Why did you recommend the former instead?
First, the index which both ETFs track is not the same. ETF A tracks the MSCI World whereas ETF B tracks the FTSE All World. So the comparison is not apple-to-apple in the first place.
Second, expense ratios do not tell the entire story.
The alpha for ETF B is -0.62% compared with ETF A’s -0.56% over a 3 years period. As it can be seen that the ETF B is worst off. Despite it only have 0.25% in expense ratio, it has more than 0.25% in tracking error.
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Other consideration when purchasing ETFs are:
- Liquidity. The higher the liquidity the better.
- Reputation of the ETF provider.
- Tax impact. Recently I met another person who invested more than US$500,000 of stocks listed in the US because he follows some website. When I told him he is being taxed 30% of all dividends received, he almost fell off the chair. When I told him of the hefty estate duty, he got another heart attack. To cut the long story short, he decided not to engage me for financial planning. I guess he still prefer to follow some website blindly instead of paying a fee for professional advice.
- And whether is the ETF ‘synthetic’ or ‘physical’.
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