Investors have been flooding into exchange-traded funds because they think they’re cheap.
But costs are tricky, and assessing them can be more complicated than simply looking at how much funds say they cost. This is especially true in less-traded debt, such as speculative-grade bonds, which tend to be more unpredictable and expensive to trade.
A perfect example of this is State Street’s $11.7 billion SPDR Bloomberg Barclays High Yield Bond ETF. It has returned 7.37% in the past three years, or 5.4 percentage points less than its benchmark index. That’s equal to an average annual lag of 1.69 percentage points in the period.
In other words, while this ETF, which trades under the ticker JNK, says its expense ratio is 0.4%, a more realistic assessment of the cost over the past three years amounts to 1.69%.
This tracking difference is “the most under-rated piece of ETF due diligence that’s out there,” said Bloomberg Intelligence’s Eric Balchunas. “Your net cost is how much did you miss that benchmark by.”