Which ETF is better? Yield vs Expense Ratio

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Topic Author
boglehooligan
Posts: 96
Joined: Mon Mar 23, 2020 11:38 am

Which ETF is better? Yield vs Expense Ratio

Post by boglehooligan »

Hello all,

Assuming that there are 2 very similar ETFs with varying divided yields and expense ratios.

If dividends are reinvested, which ETF would you choose? :confused

ETF A
Expense Ratio: 0.50%
Dividend Yield: 4.65%

ETF B
Expense Ratio: 0.23%
Dividend Yield: 3.81%

Is there a simple formula to use to work it out?
rkhusky
Posts: 17654
Joined: Thu Aug 18, 2011 8:09 pm

Re: Which ETF is better? Yield vs Expense Ratio

Post by rkhusky »

boglehooligan wrote: Sat Oct 24, 2020 12:38 am Hello all,

Assuming that there are 2 very similar ETFs with varying divided yields and expense ratios.

If dividends are reinvested, which ETF would you choose? :confused

ETF A
Expense Ratio: 0.50%
Dividend Yield: 4.65%

ETF B
Expense Ratio: 0.23%
Dividend Yield: 3.81%

Is there a simple formula to use to work it out?
Bond funds or stock funds? Taxable or tax-advantaged account? Dividends don't matter much with stock funds, apart from taxes. If a bond fund, why are the dividend yields different? Risk?

All else being equal, I would go with the lower expense. But often, all else is not equal.

And dividend yield is after expenses are taken out.
Valuethinker
Posts: 48949
Joined: Fri May 11, 2007 11:07 am

Re: Which ETF is better? Yield vs Expense Ratio

Post by Valuethinker »

boglehooligan wrote: Sat Oct 24, 2020 12:38 am Hello all,

Assuming that there are 2 very similar ETFs with varying divided yields and expense ratios.

If dividends are reinvested, which ETF would you choose? :confused

ETF A
Expense Ratio: 0.50%
Dividend Yield: 4.65%

ETF B
Expense Ratio: 0.23%
Dividend Yield: 3.81%

Is there a simple formula to use to work it out?
With stock funds dividend yield is meaningless what matters is total returns. If the funds are tracking the same underlying index you generally choose the one w lower ER. Big "if" though.

With bond funds generally higher risk. Those sorts of yields are high yield junk bond yields OR emerging market bonds.

You want to think carefully about your tolerance for risk and analyse max drawdown in 2008/9 and March 2020 before you commit a lot to funds with that sort of yield.
jebmke
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Joined: Thu Apr 05, 2007 2:44 pm
Location: Delmarva Peninsula

Re: Which ETF is better? Yield vs Expense Ratio

Post by jebmke »

I would be suspicious of any fund, equity or bond, that had a yield significantly greater than 2%.
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Topic Author
boglehooligan
Posts: 96
Joined: Mon Mar 23, 2020 11:38 am

Re: Which ETF is better? Yield vs Expense Ratio

Post by boglehooligan »

These are a preferred ETFs where one is a UCIT and the other is US and both dividends are calculated as NET

Im trying to learn how both Yield and ER impact an investors total return over a long period
hudson
Posts: 7098
Joined: Fri Apr 06, 2007 9:15 am

Re: Which ETF is better? Yield vs Expense Ratio

Post by hudson »

boglehooligan wrote: Sat Oct 24, 2020 9:48 am These are a preferred ETFs where one is a UCIT and the other is US and both dividends are calculated as NET

Im trying to learn how both Yield and ER impact an investors total return over a long period
boglehooligan,

For bond ETF's I like to look at:
Average Duration...I usually go for intermediate duration...but you your duration should match your time frame.
% of AAA/AA/A bonds...I want it to be high quality
SEC Yield
Expense Ratio
Distribution Yield

If the ETF is paying out over say 2.5%, it may not be high enough quality for me.

Bottom Line...a very low expense ratio is good; high yields usually mean high risk
Valuethinker
Posts: 48949
Joined: Fri May 11, 2007 11:07 am

Re: Which ETF is better? Yield vs Expense Ratio

Post by Valuethinker »

boglehooligan wrote: Sat Oct 24, 2020 9:48 am These are a preferred ETFs where one is a UCIT and the other is US and both dividends are calculated as NET

Im trying to learn how both Yield and ER impact an investors total return over a long period
Equity funds

Yield only matters if you pay tax on the dividend income. Then higher yield, all other things being equal, is lower performance. That's why Warren Buffett (Berkshire Hathaway) has never paid a dividend - see his letters to shareholders on same.

Bond funds

Yield is a sign of risk. Higher yield, higher risk. Since US Treasury bonds are currently yielding less than 1%, any yield above that means more risk is being taken on.

Both types of funds

Expense ratios matter a lot. Generally the higher the expense ratio, the worse the performance. Try to keep all your ERs under 0.5% (50 basis points) and especially so for bond funds - the yields on bonds are now so low that you don't want to be paying away half the yield of the fund in expenses.

0.1% on $100k invested is $100 pa, but compounded then for the whole time you own the fund (you didn't get the return on that $100 next year, or the year after, or the year after ...). If you convert expense ratios into amount of your money paid away, it helps conceptualising them.
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