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Summary The IQ Leaders GTAA Tracker ETF was just launched at the end of September. It’s designed as an “ETF of ETFs,” but its high expense ratio makes it less than an ideal choice for long-term investors. I offer two alternatives that would achieve a similar investment objective to this ETF at a much lower cost. I have a generally negative sentiment when it comes to “fund of funds” products whether they are mutual funds or ETFs. The main reason is that I think many of them layer on unnecessary fees for investors and can generally be replaced by an index mutual fund or ETF that charges a razor-thin expense ratio (the Vanguard funds, for example). I found myself feeling that way again when the IQ Leaders GTAA Tracker ETF (NYSEARCA: QGTA ) was launched at the end of September. This ETF is designed to be an “ETF of ETFs,” and looks to, according to the fact sheet , “track the performance and risk characteristics of the 10 leading global allocation mutual funds.” What it’s doing essentially is taking the most popular sector ETFs and investing in order to maximize the fund’s risk/return profile. The fund’s holdings are detailed below: (click to enlarge) There are a couple of things that immediately stand out to me when looking at this list. All of these products are managed by either State Street (NYSE: STT ), Vanguard or BlackRock (NYSE: BLK ). These companies are very low-cost providers generally speaking, and each of these ETFs have an expense ratio in the range of 0.07% to 0.20% (with the exception of the SPDR Barclays Capital Convertible Bond ETF (NYSEARCA: CWB ) that carries a 0.40% expense ratio and the iShares iBoxx USD High Yield Corporate Bond ETF (NYSEARCA: HYG ) with a 0.50% expense ratio). So individuals would be paying very little to invest in any of these funds. According to the fund’s fact sheet, this new ETF is charging a 0.60% annual expense ratio. Keep in mind that this fee is charged on top of the expenses that are already being charged by each ETF individually and that additional expense charge really adds up over time. Consider the two graphs below (courtesy of Vanguard’s website ): This examines how an expense ratio erodes the return of an investment over time. In this example, I use an estimated expense ratio of 0.20% (a close estimate of what someone would pay investing in each of these ETFs individually) and an average return of 6% annually. Over a 50-year time frame on a $10,000 investment, returns lost to expenses come to a total of $111,606. A large number to be sure, but take a look at what the GTAA Tracker ETF would do over time. With the same assumptions, except using an expense ratio of 0.80% (the 0.60% charge of the fund plus the individual ETF expense ratio already detailed above), the total lost to expenses jumps to $385,760. That’s over $250,000 (roughly a third of the fund’s returns) that is being paid over time to the fund managers instead of staying in your own pockets. That’s a lot of money sacrificed for not managing the ETFs one’s self. Which brings me to my second point. Most people, understandably, don’t want to manage a portfolio of ETFs and reallocate them regularly. That’s where the fund-of-funds concept holds its appeal. But investors can do better. If you look at the fund’s holdings, you’ll find that the total allocation works out to roughly 47% stocks and 53% bonds. I’ve written before about how the Vanguards Wellington Fund (MUTF: VWELX ) is one of the best mutual funds for retirement out there. It maintains an allocation of roughly 2/3 stocks and 1/3 bonds, so it doesn’t perfectly match this ETF’s allocation, but it’s still a good comparison. Wellington’s sister fund, the Vanguard Wellesley Income (MUTF: VWINX ) is another option for more conservative investors with its 1/3 stocks and 2/3 bond allocation. Both of these funds are rated 5 stars by Morningstar and carry expense ratios of just 0.25%, putting them closer to the low-cost category than the GTAA Tracker ETF. Conclusion While there’s nothing inherently wrong with the investment choices made within this ETF (in fact, most are among the lowest-cost choices within their chosen class), the high expense ratio of this fund makes it less than ideal for long-term investors. Trimming fund expenses is the easiest way to improve the long-term returns in one’s investment portfolio. I’ve offered two alternatives that combine both an excellent long-term performance record and low costs, leaving more of the investment return where it belongs. For the time being, investors should look for other alternatives to this ETF. Scalper1 News
Scalper1 News