September 11, 2010

About Time...

The Vanguard Group announced this week that it is now offering a new ETF tracking the S&P500 Index at a rock bottom expense ratio of only 0.06%.  Please consider: Vanguard offers 500 Index Fund ETF Shares

Vanguard S&P 500 ETF (ticker: VOO) features an expense ratio of 0.06%, the lowest expense ratio in the industry among ETFs based on the S&P 500 Index or any other large-capitalization domestic benchmark (source: Morningstar, Inc.).

The Vanguard group of funds have generally been exemplary advocates for average investors providing good value for money. That also shows in the range of financial products which are typically on the lower end of costs to the investor.  Hence, this new ETF is clearly a positive development, particularly in light of the recent trend to bring more complex ETFs (at much higher expense ratios) to the market.  It may also send a signal to the industry to consider lowering their fees, more so when many of them are highly correlated with the major market indices anyway (see earlier commentary).  

Still, there are certain caveats to consider.  As always, you should read the prospectus before investing.  A copy of the prospectus can be downloaded here: Vanguard S&P 500 ETF – Prospectus

Further, one should consider watching the price and trading behavior of this new ETF for a while.  The most heavily traded benchmark ETF (also happens to be the oldest ETF) is the SPDR S&P500 (ticker: SPY) with current net assets of about $72Bn - certainly an index fund that won’t get into any kind of liquidity bottle necks, no matter how big of a trade you may wish to put on.

One should also consider watching the tracking strength of VOO for a while.  As we noted before, many of the more recent and more complex ETFs are doing a poor job in tracking the underlying assets for a longer period of time.  This should not be the case for VOO but just to be safe, give it some time and then track back how it actually performed against the benchmark.  There are numerous ways in which you can do that.  One of the easiest ways to compare is with the help of one of the many sites (e.g. that offer direct comparisons on their charting tools.


Let’s check back in 4-6 months to see how this ETF tracked the market.  You can then better assess whether the 0.03% savings in expenses over the mother of all ETFs, SPY, is actually worth it. In the meantime, hats up to Vanguard for giving a refreshingly positive signal to the investing community!

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