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TheStreet.Com Ratings: Beware High-Fee ETFs

Be careful the next time you buy an exchange-traded fund. One of the major reasons these funds that trade throughout the day like stocks have been so popular is that their expenses are generally lower than open-end mutual funds.

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. 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.

ETFs With Biggest, Smallest Expense Ratios
Even the most expense ETFs are still bargains compared with the average mutual fund.
Name Ticker Market Cap ($Mil) Total Expense Ratio (%)
PowerShares FTSE RAFI US 1000 PRF 114.3 0.76
iShares MSCI Emerging Markets EEM 13,391.9 0.75
PowerShares Zacks Small Cap PZJ 58.9 0.75
iShares FTSE/Xinhua China 25 FXI 3,658.1 0.74
PowerShares Lux Nanotech PXN 107.7 0.73
PowerShares Zacks Micro Cap PZI 160.6 0.72
PowerShares Gldn Drgn Hltr USX Chn PGJ 265.8 0.71
PowerShares Val Line Timeliness Sel PIV 167.9 0.71
PowerShares Wilder Clean Energy PBW 584.0 0.71
Vanguard Mid Cap ETF VO 1,488.9 0.13
Vanguard REIT ETF VNQ 1,587.0 0.12
Vanguard Small Cap Growth ETF VBK 418.2 0.12
Vanguard Small Cap Value ETF VBR 329.0 0.12
Vanguard Growth ETF VUG 732.8 0.11
Vanguard Value ETF VTV 942.4 0.11
iShares S&P 500 IVV 18,074.7 0.10
SPDR 500 SPY 57,572.5 0.10
Vanguard Small Cap ETF VB 559.6 0.10
Vanguard Extended Market ETF VXF 496.7 0.08
Vanguard Large Cap ETF VV 376.8 0.07
Vanguard Total Stock Market ETF VTI 6,236.9 0.07
Widows is a financial analyst for Ratings. Prior to joining, Widows was senior product manager for quantitative analytics at Thomson Financial. After receiving an M.B.A. from Santa Clara University in California, his career included development of investment information systems at data firms, including the Lipper division of Reuters. His international experience includes assignments in the U.K. and East Asia.

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