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TheStreet.Com Ratings: Beware High-Fee ETFs

Richard Widows

But that's not always the case, and investors expecting razor-thin expenses should check before executing a trade.

With an average ratio of 0.41%, ETF expenses are almost a full percentage point below the comparable figure of 1.38% for traditional open-end mutual funds. But some ETFs are hitting their investors with annual fees that have wandered well into the range of actively managed open-end funds.

TheStreet.com Ratings database identified the ETFs with the highest and lowest expense ratios. The table below includes those with annual fees and expenses greater than 0.70% and those with fees and expenses less than 0.15%. It includes nine ETFs with expense ratios at the high end of the spectrum and 12 with margins at the bargain basement level -- some are as low as seven cents per year for every $100 managed.

Index fund pioneer Vanguard dominates the bargains with 10 low-expense ETFs, while the PowerShares brand, which is best known for specialty ETFs, has seven of the high-margin funds carry the brand. With some exceptions, larger funds seem able to offer lower expenses, although an argument could be made that the larger funds attracted more investors because they kept fees and expenses under tight control.

Because the high-expense ETFs on the top list generally have lower market capitalizations, their expenses are spread over smaller bases and tend to be relatively high. Investors who wish to participate in areas such as nanotech and micro-cap should be aware that they are handing over expense payments as much as 10 times higher than other ETFs.

The average expense ratio of the funds in the lower list stands at 0.10% compared with 0.73% for the high-margin group at the top. It's worth noting that even the ETFs with the highest fees are still significantly less expensive than the average mutual fund.

Growing at a rate of 10% per year before expenses, a $10,000 investment will compound to $66,062 in 20 years with an expense ratio of 0.10%. However, that same investment would only grow to $58,887 when saddled by fees and expenses of 0.73%. In that case, the reward for checking the data before buying is an extra $7,175 on an initial investment of $10,000.