Low-cost passive ETFs and magical thinking

Reduced activity, low fees and tax efficiency are reasons given for why passive investing is low-cost for the investor. This logic is wrong. Those are reasons why passive investing is low-cost for the fund management company. The reason those cost-savings get passed to the investor is because the product is standardised by virtue of tracking a standard, named index like the S&P 500, and multiple companies compete to provide the same product.

Without competition, there’s no reason for an ETF to be low-cost. Companies offering unique ETFs have no directly, easily comparable competition, and you should not expect them to be as efficient as SPY, IVV and VOO are.

Comments are closed.