Hidden ETF expenses ?? Help !!

[Medalion]

I'm a newbie - this is my first post, but I am an old-timer in the (personal) stock investing business, followed by being a company saving plan enthusiast , followed by conversion to mutual fund diversification, and am, at present, an ETF devotee. Most of the phases of my investment evolution have been prompted by concern about the expense of maintaining long-term investment positions. Back in the old days, one purchased company stock, received a stock certificate in the mail, then stored it away in a strongbox - the initial broker commissions were excessive, but the cost (annual expense) of managing the investment was nearly nil. The company saving plan phase carried a high management cost and diversification was difficult to achieve, but both of these objections were offset by the generous company matching contribution. At the appearance of discount brokers and of mutual funds, expenses decreased dramatically. Now with the availability of ETFs, maintenance expenses are truly bargains.

This brings me to the reason for this post. My questions is - are there hidden costs associated with owing ETFs, and if so, how does one accurately determine the true total cost of holding these investments?

The "discovery" which has set me thinking along these lines is that, in researching suitable global ETF possibilities, I noticed that at least one of "ultra-low" expense-ratio Vanguard's ETFs seem to have half of the expenses hidden in the structure of the fund. The ETF in question is Vanguard Total Intl Stock Index (VGTSX). The investments held by this fund are three other Vanguard mutual funds - Vanguard European Stock Index Fund, the Pacific Stock Index, and the Emerging Markets Stock Index Fund (VEURX, VPAX and VEIEX). In regard to expenses, my question is how much are they? The prospectus info lists the expense ration of the VGTSX at .22%. However, it would appear that the the funds which make up 100% of this ETF's holdings each also sport an expense ratio equal to or greater than .22%. Doesn't this amount to doubling the actual expenses for the investor?

Any clarification, comments or WAG are actively and anxiously awaited.

[rodney]

Hello there,
If the prospectus is saying .22% expense rati on that etf then that would be the only expense involved on purchasing that ETF regardless of what that certain etfs holdings are.


SEC requires all ETF management companies to fully display the management costs on all etfs with no hidden expenses.

So the bottom line is you would only be paying that .22% !

Hope that helps!

[Medalion]

rodney:

I am still confused. I agree that the expense ratio for the Vanguard VGTSX ETF is the .22% stated in the prospectus. However, digging a little deeper, the ETF's only holdings are three other Vanguard mutual funds. Each of these funds list an expense ratio of .22% (or greater). So I am lead to conclude that, if an investor buys the ETF and holds it for, say, a year, then his/her expense outlay equals .44%? And errors of 100% concern me greatly!

To put it another way - cannot the investor simply purchase the three component Vanguard mutual funds in the same proportion as the ETF, and reduce his/her expense outlay to .22%?

The bigger concern is to learn if this kind of structure is endemic within the ETF industry - are there expenses unknowingly assumed by the investor which are associated with the holding of the ETF but which are not apparent. This example is pretty blatant and easily discovered, but is not mentioned in the prospectus that I can find.

Thanks for the reply.