3 Oct

Why Smart Beta Costs More

WRITTEN BY Peter Barnes

Market Realist: Is there anything else that you would like to add?

Dave: I often see in the press that “smart beta costs more.” It’s important to understand that it’s really what we’re comparing smart beta against. These are not higher fees against active mutual funds or hedge funds. I was actually, for another purpose, looking up a mutual fund today that basically tracks a traditional smart beta strategy. It had a 5.7% front load and a 1.7% annual management fee. If you think about it, not necessarily delivering anything advanced from a return perspective, and an investor in year one is paying more than 7% to get to that return. So, a smart beta ETF that would charge 65 bps or 40 bps – and there are some that are even less – that’s basically free when you compare it with the active side.

Market Realist’s View:
The Declining Cost of Investing

The expense ratio is the annual fee charged by funds to their investors for expenses related to fund management, including management fees, administrative fees, and operating costs. Normally, the expense ratio is very high for funds with small asset bases because the fund has to meet its expenses from a limited resource base. In contrast, expense ratios go down with a rise in asset base as expenses are divided across the larger asset base.

Why Smart Beta Costs More

The expense ratio is expressed as a percentage of assets under management. As the chart above shows, expense ratios vary with the type of fund. According to Morningstar Investment Research, the asset-weighted expense ratio across all funds, including mutual funds and exchange-traded products, fell to 0.64% in 2014 from 0.65% in 2013 and 0.76% in 2009.

Presently, the average ETF carries an expense ratio of 0.44% or $44 per year for every $10,000 investment while the average traditional index fund costs 0.74%.

Hedge funds may charge higher management fees of around 1-2% regardless of the fund’s performance. However, in recent times, average hedge fund fees have fallen to 1.67% of total assets under management.

Latest articles

Broadcom (AVGO) stock fell ~8.5% after markets closed yesterday following the semiconductor giant's fiscal 2019 second-quarter earnings release. It missed analysts' revenue estimate and cut its fiscal 2019 revenue guidance by $2 billion to $22.5 billion due to sluggishness in its semiconductor solutions business.

The SPDR Gold Shares ETF (GLD), which tracks physical gold prices, has underperformed the broader markets year-to-date, rising just 4.4% compared to the S&P 500’s (SPY) gain of 15.9% as of June 14. The sentiment for gold, however, has been turning around.

Safe havens such as Treasuries and gold were back in favor on June 14 as stocks fell due to rising tensions in the Middle East, concerns over growth, and the looming threat of the US-China trade war. The tech-heavy Nasdaq Composite Index fell 0.67% in the first hour of trading.

Lululemon (LULU) stock rose 2.1% on June 13 in reaction to better-than-expected first-quarter results and an upgraded outlook for fiscal 2019 overall. The company's first-quarter adjusted EPS grew 34.5% to $0.74 on revenue growth of 20.4% to $782.32 million. Analysts had expected EPS of $0.70 and revenue of $755.31 million. Here's why the outlook got an upgrade.

14 Jun

IEA Again Slashes Its Oil Demand Growth Estimate

WRITTEN BY Rabindra Samanta

As of 4:40 AM Eastern Time today, US crude oil active futures were at $51.83, ~4% below their closing level in the previous week. If US crude oil prices stay at those levels today, they'll mark their third week of decline in five weeks.

14 Jun

Why Kimberly-Clark Stock May Stop Rising


Kimberly-Clark (KMB) stock has risen 20.5% this year, boosted by the company’s better-than-expected sales and earnings during its last reported quarter. However, its stock could stop climbing. Here's why.