Home Logon FTA Investment Managers Blog Subscribe About Us Contact Us

Search by Ticker, Keyword or CUSIP       
Blog Home

  Are Expense Ratios a Dependable Predictor of Returns for Large Cap US Equity ETFs?
Posted Under: ETFs

In 2010, Morningstar published a study which argued that expense ratios are "the most dependable predictor of performance" for mutual funds.1; This study included roughly 5 years of mutual fund performance data, based upon which the authors recommended that investors focus on the cheapest 40% of mutual funds as a starting point in the due diligence process.  While some have sought to apply similar heuristics to ETFs, the evidence presented below pertaining to US large cap equity ETFs calls into question the sensibility of this application.  Over the past 5 years (as of 2/29/16), the cheapest large cap US equity ETFs have tended to underperform ETFs with higher expense ratios, with significantly fewer funds producing excess returns versus their respective S&P benchmarks.2

Click Here to continue reading.

¹"How Expense Ratios and Star Ratings Predict Success", Morningstar, 8/9/2010.
²Data obtained from Morningstar Direct. Including all ETFs from Large Cap Blend, Large Cap Value, and Large Cap Growth categories, with at least 5 years of performance history on 2/29/16 (80 ETFs).  This necessarily excludes ETFs that existed on 2/28/11, but have since become obsolete (23 ETFs).  While many of these ETFs would have been included in group #3, poor performance does not appear to be the primary cause of their obsolescence, in our opinion.  For the ETFs that would have been included in group #3 that accumulated at least 2 years of operating history (14 of 19 ETFs), 2 of 3 (67%) large cap value ETFs outperformed the S&P 500 Value Index in the 2 years prior to closing, 3 of 5 (60%) large cap growth ETFs outperformed the S&P 500 Growth Index in the 2 years prior to closing, and 1 of 6 (16.7%) outperformed the S&P 500 Index in the 2 years prior to closing.

Posted on Thursday, March 17, 2016 @ 2:48 PM • Post Link Print this post Printer Friendly

These posts were prepared by First Trust Advisors L.P., and reflect the current opinion of the authors. They are based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
Search Posts
Dave McGarel
CIO, COO | Bio
  1. Market Minute
Bill Housey
Senior Portfolio Manager | Bio
  1. Income Insights
Ryan Issakainen
ETF Strategist | Bio
  1. ETF Data Watch
  2. ETF Observations
  3. Inside First Trust ETFs
  4. First Trust ROI Podcast
Jeff Margolin
Closed-End Fund Analyst | Bio
  1. Closed-End Fund Quarterly Commentary
Client Resource Kits
  1. Alternatives
  2. Equity
  3. Fixed-Income
  4. Markets In Perspective
  5. Investment Themes
Other Newsletters
  1. Alternatives Update
  2. Housing Tracker
  3. Commercial Real Estate Tracker
  4. Equity Newsletter
  5. Weekly Market Commentary
  6. Weekly Market Watch
Subscribe To Receive Email

Staying the Course with FVD
Robust Growth for Municipal Bond ETFs in 2015
The Return of Volatility and the Case for Earnings Quality
Third Quater 2015 CEF Review
Diversify Your Short Duration Income Portfolio
Questions to Ask Your "Smart Beta" ETF
Second Quater 2015 CEF Review
Inside First Trust ETFs: A Snapshot of Q1 Flows and Trends
First Quarter 2015 CEF Review
Two Trillion Dollars and Counting…
Skip Navigation Links.
Search by Topic
Skip Navigation Links.

The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. By providing this information, First Trust is not undertaking to give advice in any fiduciary capacity within the meaning of ERISA, the Internal Revenue Code or any other regulatory framework. Financial professionals are responsible for evaluating investment risks independently and for exercising independent judgment in determining whether investments are appropriate for their clients.
Follow First Trust:  
First Trust Portfolios L.P.  Member SIPC and FINRA. (Form CRS)   •  First Trust Advisors L.P. (Form CRS)
Home |  Important Legal Information |  Privacy Policy |  California Privacy Policy |  Business Continuity Plan |  FINRA BrokerCheck
Copyright © 2024 All rights reserved.