ETFs exposed! Are they truly cost-friendly?

ETFs have lower expense ratios, yet often lag behind index funds

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You must know of people who enjoy haggling with street vendors and rickshaw drivers, seeking the best deal, only to splurge on impulsive shopping sprees.

This tendency of being pennywise and pound-foolish can also manifest in the realm of investing, especially if you happen to be an ETF (exchange-traded fund) investor.

ETFs have earned immense popularity among passive investors in the last few years, primarily because of their low-cost advantage. The median expense ratio of the top five Nifty-50 ETFs is 0.07 per cent, as against 0.18 per cent charged by index funds.

But does the low expense ratio of an ETF actually give it a distinct edge over its rival, index funds? Let’s find out.

ETF vs index fund: A head-to-head fight

To make a fair comparison, we analysed the top-three Nifty-50 ETFs and index funds offered by the same AMC over the last five years.

In the case of ETFs, we took the average of a day’s high and low price as a proxy of an investor’s transaction price. The returns based on this proxy price were compared with index funds. See the table ‘ETF vs Index fund’.

Strikingly, despite ETFs’ low-cost advantage, they haven’t always outperformed an index fund.