Cheaper S+P 500 ETF Launched

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The cheapest S&P; 500 ETF was brought to the market as reported in ”Vanguard Launches New, Cheaper S&P; 500 ETF:”

It’s been a long time coming, but an S&P; 500 ETF from Vanguard is finally here. The Valley Forge, Pennsylvania-based firm rolled out the Vanguard S&P; 500 ETF (VOO) on Thursday, nearly 35 years after the company introduced an S&P; 500 index mutual fund that laid the groundwork for the rise of indexing as an investment strategy. Earlier this decade Vanguard got caught up in a legal dispute with S&P; over the licensing of the index, leading the company to build its line of ETFs around indexes maintained by MSCI–a relative unknown in the industry at the time.

It shouldn’t be surprising to too many investors that Vanguard’s S&P; 500 ETF will come in with a lower expense ratio than its most direct competitors; VOO will charge 0.06%, or three basis points less than the S&P; 500 SPDR (SPY) and S&P; 500 Index Fund (IVV). The existing S&P; 500 ETFs from State Street and iShares have aggregate assets of approximately $80 billion. VOO will join Schwab’s U.S. Broad Stock Market ETF (SCHB) as the cheapest ETF on the market [see 25 Cheapest ETFs]. Vanguard and Schwab have been the two firms primarily responsible for an escalation of price wars in the ETF industry over the last year; both have cut management fees on existing funds and introduced new products that offer lower expense ratios than their most direct competitors.

In addition to VOO, Vanguard rolled out eight additional funds offering exposure to the S&P; MidCap 400 Index and S&P; SmallCap 600 Index, as well as the value and growth subsets of those benchmarks:

* S&P; Mid-Cap 400 ETF (IVOO)
* S&P; Mid-Cap 400 Value ETF (IVOV)
* S&P; Mid-Cap 400 Growth ETF (IVOG)
* S&P; Small-Cap 600 ETF (VIOO )
* S&P; Small-Cap 600 Value ETF (VIOV)
* S&P; Small-Cap 600 Growth ETF (VIOG)
* S&P; 500 Value ETF (VOOV)
* S&P; 500 Growth ETF (VOOG)

Each of these products will also compete very closely with existing ETFs, primarily products offered by iShares. Expense ratios on the new Vanguard funds range from 15 to 20 basis points, making them competitive from a cost perspective. “The new Vanguard index funds and ETFs offer our trademark low costs and tax efficiency, and aim for the utmost tracking precision. They will appeal to financial advisors and institutional investors seeking to build portfolios based on S&P; benchmarks,” said Vanguard Chairman and CEO Bill McNabb in a press release. “In particular, the new ETFs will offer additional choices to investors and help Vanguard continue to build momentum in the ETF marketplace.”

Sure, the competition for lower prices in the ETF universe has heated up and will be a benefit to the investing public. However, to my way of thinking, price is one thing and volume is another.

Just because an ETF has low annual expenses does not make it appropriate. You want to be able to place a trade quickly and see it executed without much slippage and/or a large bid/ask spreads.

To accomplish that, you need to use ETFs with high average volume. For example, if I want to trade the S&P; 500 in my advisor practice, I only use SPY, which, with over $1 billion (with a “b”) average daily volume, is the mother of all S&P; 500 ETFs; no one else comes even close.

Large orders get filled with lightening speed, which can be important if you need to get out in a fast moving market. While low annual expenses are important, be sure to give average daily volume an equal consideration.

Disclosure: No holdings

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