Index funds have helped make investing easier. They’re convenient, widely available, generally inexpensive, and easy to understand at a high level. Pick the part of the market you want exposure to, choose a fund that tracks it, and invest.
That simplicity is part of their appeal. But it can also create the impression that index funds are more interchangeable than they really are.
Start with cost.
Index funds have become so closely associated with low fees that investors may barely notice the difference between an expense ratio of 0.02% and one of 0.0945%. Both sound tiny.
But tiny percentages can still add up.
State Street currently offers two ETFs that seek to track the S&P 500: SPYM, with an expense ratio of 0.02%, and SPY, which charges 0.0945%. State Street itself describes both as ways to access the same S&P 500 exposure, while noting that investors may choose between them partly based on cost and liquidity.
Consider a hypothetical $250,000 investment held for 20 years. Assuming a 7% annual return before expenses and otherwise identical performance, the lower-cost fund would leave the investor with roughly $13,000 more at the end of the period.
Neither fee looks large. The difference still matters.
So cost is a good place to start.
But it isn’t where the comparison ends. Two funds can also carry nearly identical labels while tracking very different indexes.
Recently, The Wall Street Journal compared several major ETFs categorized as large-cap growth funds. At the time, one was up just 4.6% for the year while another had gained 24.3%—a difference of nearly 20 percentage points.
That doesn’t mean the higher-returning fund was necessarily the better investment. It means the funds weren’t as similar as their labels suggested.
Different index providers use different definitions of terms like “growth” and “value,” different rules for choosing and weighting stocks, and different schedules for rebalancing their indexes. In this case, exposure to a handful of rapidly rising semiconductor stocks helped create dramatically different results among funds that appeared, at first glance, to occupy the same category.
That leaves investors with two useful questions when comparing index funds:
What does it cost? And what do I actually own?
Expense ratios matter, particularly over long periods. If two funds provide essentially the same exposure, lower costs generally mean more of the investment return stays in your portfolio. But similar names do not necessarily mean similar investments. The benchmark, underlying holdings, concentration, weighting methodology, and rebalancing rules can all affect how a fund behaves.
Just as importantly, a fund shouldn’t be evaluated in isolation. An index fund that looks perfectly reasonable on its own could duplicate investments you already own, increase your exposure to a handful of companies, or leave gaps elsewhere in your portfolio.
That’s ultimately the distinction between buying an investment and building a portfolio.
Index funds have made the first part remarkably easy. The second still requires understanding how all the pieces work together.
At Hanover Advisors, we look beyond individual fund names and expense ratios to evaluate how investments fit within the broader portfolio—what you own, what you’re paying, where risks may be concentrated, and whether your investments are working together toward your long-term goals.
If you’re unsure what’s actually inside your portfolio—or whether the funds you own are doing the job you think they are—talk with your Hanover advisor. We can help you take a closer look.