2 ETF Marketing Tricks You Need To Be Aware Of

As The Juice continues to focus on retirement in 2024, we also focus on ETF investing, because the approach can play a key role in solidifying your retirement plans. 

However, as straightforward as ETF investing can be, there are potential pitfalls. We’ll cover a couple of them today. 

In case you missed them, here are two of our most popular newsletters in each area from the last few months. 

Retirement: Has Retirement Had Its Day? 

ETF Investing: How To Research An ETF

Now, the two marketing tricks. 

The first comes from a Canadian economist and investing writer we like, Ben Le Fort. In a recent post, Le Fort points out how meaningless promotion of past returns are, particularly when dealing with index ETFs:

If two companies offer an index fund that mirrors the performance of the S&P 500, you shouldn’t even bother comparing the past performance of each fund. Both funds do the exact same thing and should provide nearly identical returns.

Imagine you are picking between two S&P 500 index funds:

• Fund 1 has annual returns of 37.7% since inception.
• Fund 2 has annual returns of 70.1% since inception.

You might wonder how is this possible, if both funds track the S&P 500 shouldn’t they have the same annualized returns?

This is where smoke and mirrors comes into play:

Fund 1 has been active since February 2020, and Fund 2 has been active since March 2020; the only difference is that Fund 1 opened right before the Covid market crash and Fund 2 opened right as the market recovery began.

That makes Fund 2 look impressive—even though we know that impressive-looking past returns have literally zero impact on what you might expect to earn in the future or if it will be a better investment than Fund 1.

If index funds all do the same thing—and since your return as an investor is equal to returns minus fees—the best way to maximize your return investing in index funds is to pick the fund with the lowest fee.

Exactly. 

As The Juice explained in What Is An ETF Expense Ratio, the fee you’ll pay to own shares of an index ETF — or any ETF for that matter — is what matters. 

In today’s Trackstar top five, you’ll find two ETFs that essentially do the same thing. The SPDR S&P 500 ETF (SPY) and Vanguard S&P 500 ETF (VOO) both mimic the returns of the S&P 500 Index. 

If you compare the performance between the two funds (SPY has been around since 1993, VOO since 2010), you’ll see they’re basically identical. Over some time periods, you might find a small difference of between a few tenths to nearly one percent. But, for all intents and purposes, they’re the same type of fund doing exactly the same thing. 

The main difference — and, even if notable, it’s not a huge one — is the expense ratio each fund charges. VOO’s is 0.03%, while SPY’s is 0.09%. This isn’t a huge surprise, given that Vanguard is an industry leader on low fees. 

Why does SPY charge more? While we can’t say for sure, it’s likely a mix of factors, including heavy marketing and advertising and the fact that it has been around longer. If you got into SPY back in the day, you might just be happy to not break the chain and stay there. Especially if you got into it through a company 401(k) or something. 

Comparing the two:

$100,000 invested in SPY means you’ll pay $90 in a year. As your investment grows, you pay more each year. SPY’s 0.09% expense ratio on a $120,000 balance equals $108.

In VOO, you’ll pay just $30 on a $100,000 balance and $36 on a $120,000 balance.

With two super low expense ratios, the differences aren’t all that meaningful. It’s when you get into other index-tracking funds — including relative newcomers — that you might see higher expense ratios eat away at what are ultimately the same returns. 

The second marketing trick is when a fund says it specializes in something. This is typical of active ETFs, particularly thematic ETFs. We recently discussed how many thematic ETFs love to capture and market towards what’s hot today, touting their focus on, as the most relevant, present day example, artificial intelligence (AI). While this doesn’t always make them bad investments, it often means investing in them doesn’t always make a ton of sense. 

For example, as we scroll through our Trackstar database, which tracks the number of searches investors are conducting for stock and ETF tickers across our 100+ financial media partners, the first ETF with AI in its name is the Global X Robotics & Artificial Intelligence Thematic ETF (BOTZ) with 6,392 searches. 

Fancy ticker symbol. Capitalizing on AI. And an expense ratio of 0.69%. 

Meanwhile, the fifth most searched ETF in Trackstar — the VanEck Vectors Semiconductor ETF (SMH) — has an expense ratio that’s just about half that, at 0.35%. 

The top holding in each fund is, not surprisingly, Nvidia (NVDA). It makes up nearly 27% of SMH’s assets and 8.5% of BOTZ’s portfolio. From there, SMH focuses on semiconductors, as it tracks the performance of a broad semiconductor index. BOTZ looks to mirror the performance of a much less specific “thematic” index of “Global Robotics & Artificial Intelligence” stocks.  

Over YTD, six-month and one-year timeframes, SMH trounces the performance of BOTZ. This is a case when past performance matters. Because these two ETFs are not tracking the same index. One (BOTZ) says it’s an AI ETF. The other (SMH) doesn’t explicitly say that. However, you could argue that, with SMH, you’re in the better AI play because semiconductor companies make AI tick. And, of course, there’s no argument over performance. 

The main takeaway: Be skeptical of marketing. Read between the lines and realize there’s more to a fund than what the fund company says or doesn’t say. 

The Bottom Line: Really the bottom line is in that How To Research An ETF Juice we linked to at the top of the page. 

In it, we show you how to expand the scope of ETFs you consider by looking at the holdings. If you start broad with SPY and QQQ and really want to achieve some meaningful level of diversification, take great care when you expand out to other ETFs to ensure you gain exposure to new and different stocks and even the same stocks as SPY and QQQ, but at different weights. 

Fees and holdings. Probably the two most important ETF investing considerations to make. And they’re often the two elements buried or non-existent in most ETF marketing.

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