It's no secret that exchange-traded funds (ETFs) have exploded in popularity on the ASX over the past decade or two. These days, it can be hard to find an ASX investor without at least one ETF in their stock portfolios. Other investors only buy shares through ETFs and index funds.
This is understandable. ETFs can allow investors to buy swathes of shares, or indeed an entire index, with just one easy ticker code. They allow Australians simple access to exotic markets like Korea, Japan, and China, which was a pipedream for ordinary investors not too long ago.
But with the prevalence of ETFs at unprecedented levels, the chances that some investors might fall for the pitfalls of ETF investing are also a growing concern.
One of the biggest potential pitfalls I see ASX ETF investors making is paying too much in fees. Although ETF fees, which are the biggest long-term cost for passive investors, have come down quite a lot in recent years, there are still massive disparities between different funds.
You might like the sound of one particular fund's goals or exposure. However, a closer inspection might reveal you are paying, in some cases, ten times more than a similar ETF is offering.
Let's look at an example. A popular index fund on the ASX is the BetaShares Nasdaq 100 ETF (ASX: NDQ). This index fund tracks the largest non-financial shares on the American Nasdaq stock exchange. ASX investors love this fund for the exposure it offers to the lucrative US tech sector.
However, this ETF charges an annual management fee of 0.48%.
If one dives into this fund's top holdings, one will find that nine of NDQ's top ten shares at present can also be found in the top ten holdings of the iShares S&P 500 ETF (ASX: IVV).
IVV is another popular index fund, which tracks the largest 500 US stocks on the entire market. However, IVV charges an annual management fee of just 0.04%, a tenth of what NDQ asks.
Now, these two index funds are different, to be sure. NDQ offers far more tech exposure than IVV does – 49.6% compared to 30.53% at present. Digging deeper, Apple currently makes up 9.5% of NDQ's weighted portfolio, but only 6.96% of IVV's.
Even so, $100 invested in IVV today would see $28.71 go into just eight shares – Apple, Microsoft, NVIDIA, Amazon, Broadcom, Tesla, and Alphabet.
That same $100 invested in NDQ would see $46.30 head to those same eight companies. Now, some investors might be happy paying ten times more in fees just for that extra slice of tech. But many others might want to bank a little extra cash by diversifying just a little more.
Another example is the VanEck MSCI International Quality ETF (ASX: QUAL). This ETF is not an index fund. Instead, it builds its portfolio of international stocks based on 'quality' screens, such as high returns on equity and stability of earnings.
Yet out of its current top ten holdings, you'll also find Meta Platforms, Apple, Microsoft, Nvidia, and Alphabet. These stocks collectively make up 24.8% of QUAL's current portfolio.
This ETF charges a fee of 0.4% per annum. So again, you are being asked to pay ten times the annual fee of IVV for some very similar weighted holdings.
Again, this might suit some investors. But I'd wager that many more might prefer that low-cost IVV fund if presented with the reality on the ground.
