An important consideration for exchange traded fund (ETF) investors is the net expense ratio. Expressed as an annualized percentage, it tells you how much of a fund’s assets under management (AUM) is put towards operating the fund itself (and in the case of equity ETFs, not towards buying stocks).
From the investor’s perspective, it can also be viewed as the cost of buying into a fund. For a $1,000 investment in an ETF with a 0.20% expense ratio, $2 will go towards administrative fees and $998 towards the fund’s investments.
With over 3,000 tradable ETFs (and more continuously being introduced), there is a wide range of expense ratios out there. Passively managed funds that simply replicate widely followed benchmarks like the S&P 500 tend to be very low cost. Leveraged and other high-risk strategies designed to generate outsized returns typically come at a very high price. Actively managed funds pegged to more common asset classes often fall somewhere in between.
Much like food or clothes shopping, price is just one consideration. Quality matters as well. In ETF investing, quality can be defined by the same fundamental traits that are used to evaluate individual stocks — for instance, growth and valuation. Performance is important as well, with the standard industry caveat that past performance doesn’t guarantee future results.
Looking outside the classic large/mid/small and growth/value style box, investors have many unique ETFs to select from. These target specific exposures that are hard to gain in any other ETF or mutual fund — or by trying to build a portfolio from scratch.
Striking a balance between cost and fundamentals, these two specialized ETFs are highly unusual — and yet moderately priced.
How Can You Invest in the American Industrial Revolution?
The First Trust RBA American Industrial RenaissanceTM ETF (NASDAQ: AIRR) has been around for nearly a decade but remains one of the best kept secrets among U.S. ETFs. The fund invests in smaller American companies that participate in the industrial, manufacturing and community banking sectors. While the main focus is the country’s manufacturing hubs, the banks that support them with lending are included. This not only makes sense but helps diversify the fund.
Companies who generate more than 25% of their revenue from outside the U.S. are excluded as are those with negative earnings estimates for the forward 12-month period. There are also minimums on share price, market cap and trading volume.
The stock selection process starts with the Russell 2500 index and ends with approximately 50 stocks. The fund’s weighted P/E ratio of around 17x is below that of both the S&P 500 (20x) and the Russell 2000 (26x).
Since its March 2014 inception, the fund has produced an annualized return of 11.6% compared to 7.7% for the Russell 2500. Considering it has delivered almost 400 basis points in annual outperformance, AIRR’s 0.70% expense ratio is an industrial-strength bargain.
What Is a Good Christian Investment Fund?
The Inspire International ESG ETF (NYSEARCA: WWJD) is unique in several ways. It invests in biblically-aligned large cap companies that are located outside of the United States. The stock selection process uses Inspire’s in-house Impact Score that assigns a -100 to +100 score to companies based on their alignment with biblical values. Companies that are deemed to be blessings to their customers, workers, communities and the world get the highest scores.
The equally weighted fund has an 80% allocation to developed international markets and 20% in emerging markets. It contains about 200 stocks that are well-diversified by both country and sector. The ETF’s 13x P/E ratio is also a blessing.
WWJD came onto the ETF scene in September 2019 but has amassed a respectable $200 million in assets. The fund has ample liquidity and carries a 0.80% expense ratio. This is a small price to pay to 1) gain exposure to hundreds of Christian-friendly international companies in a single holding and 2) potentially earn solid long-term equity returns.
The ETF is up 10.7% over the last 12 months and 7.9% annually since inception. Faith-based income investors will appreciate that it also offers a 1.8% dividend yield.
