S&P Capital IQ analyst Todd Rosenbluth sees the State Street [profile] and Vanguard [profile] fee war as one big distraction, writes Brendan Conway for Barron's.

Over the last few months, both mutual fund managers slashed expense ratios on ETFs, but Rosenbluth told Barron's what matters is what is in the actual ETF than the miniscule cost difference. Rosenbluth compared the Consumer Discretionary Select SPDR Fund (XLY) and the Vanguard Consumer Discretionary Index Fund (VCR), noting that the former is more concentrated.

The Vanguard VCR was up 10.5 percent as of yesterday, versus the 9.3 percent SPDR fund gain, which is not a huge difference at the moment. But, Conway also says that expense-ratio changes are relatively minor, just like the 24 basis points to 19 bps drop for Vanguard's US sector ETFs. ORIGINAL ARTICLE: February 13, 2012, 4:19 P.M. ET State Street/Vanguard Fee War Is A Distraction By Brendan Conway State Street (STT) and Vanguard have been slashing expense ratios on exchange-traded funds the last few months, presumably to grab more assets. S&P Capital IQ analyst Todd Rosenbluth views it as one big distraction. The reason: What’s actually in the ETF turns out to matter more than the often minuscule difference in cost. It’s a lesson in knowing what an exchange-traded fund actually holds. Rosenbluth looks at consumer discretionary stocks in particular. The each hold Comcast (CMCSA), Walt Disney (DIS), Ford (F), McDonald’s (MCD) and Nike (NKE). Here’s the difference: The Vanguard offering puts 19% of its assets into those five and spreads the rest among 365 other stocks as of December, according to Rosenbluth. The XLY had 26% in the above-named stocks but has only 75 other holdings. So, the State Street ETF is more concentrated, clear enough. There are other differences, though. The Vanguard fund is about one-fifth invested in small- and mid-cap stocks. Meanwhile, XLY is just 6% in mid-caps, according to the analysis. Rosenbluth concludes that, in terms of going after the large-caps, “XLY is the better alternative.” So how have they actually performed? Vanguard’s VCR is up 10.5% as of Monday’s close versus a 9.3% gain for the SPDR fund. Not a huge difference at the moment, but all bets are off if smaller stocks start to separate from the rest of the market. Meanwhile the expense-ratio changes are relatively minor, for instance falling from 0.24% to 0.19% in Vanguard’s U.S. sector ETFs. 

Edited by: HFD


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