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How low-cost are Core ETFs?

Exchange-traded fund (ETF) providers are pushing ranges of new 'core' ETFs, billed as cheaper versions of the most popular funds. But are these ETFs really better than their originals?
April 28, 2015

The launch of new 'core' ETF ranges from iShares and Deutsche Asset & Wealth Management in 2014 introduced rock-bottom charges and investors scurried to sign up. But the cheaper total expense ratios (TERs) on these new products, designed to be the core foundations of a portfolio, did not necessarily mean lower costs for investors.

When the Investors Chronicle analysed the new ranges last year, it emerged that, in several cases, the cost of trading these new 'cheaper' ETFs actually made them more expensive than their original counterparts when they were held over shorter time periods. This was due to high bid-offer spreads - the difference between the buy and sell prices of the funds. A wide bid-offer spread means you are unable to make as much as you paid for something when you sell it on, and can hit returns hard.

iShares has been aggressively reducing the trading cost of its core range, bringing down the total cost of holding the ETF for investors on every front. The group has managed to wrestle average bid-offer spreads on parts of its core range down from 11.33 per cent in August 2013 to 4.16 per cent in March 2015.

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