Back in 1996, iShares was one of the first companies to create country-specific exchange-traded funds (ETFs). Their country-specific ETFs have an expense ratio of about 0.50%. While we prefer not to invest in anything with an expense ratio greater than 0.50%, iShares country-specific ETFs are our one exception. Even now, iShares is the only reasonable way to invest in several countries.

In June 2019, we wrote about new funds for Australia and Switzerland, and in March 2021 we wrote about new funds for United Kingdom, Hong Kong, and Canada. These Franklin Templeton funds, with an expense ratio of 0.09%, were expected to save our clients approximately 0.41% each year. At the end of 2021 we did an analysis of the returns and found that using these Franklin funds had saved our clients over $100,000. Now at the end of 2022, I decided to update our analysis to include all the Franklin funds we have chosen instead of the comparable iShares funds.

Expense ratios are not itemized on account statements. Neither can they be clearly seen in the returns as investment returns are usually much larger than the expense. However, expense ratios are extremely important. They directly lower your investment returns. Morningstar did a study and found that low expense ratios was the best predictor of future returns, better even than Morningstar stars.

We work hard to lower the expense ratio of funds we invest in.

On paper, we would have expected that the advantage of Franklin Templeton over iShares would be 0.42%, which is a 0.50% or 0.58% expense ratio minus a 0.09% or 0.19% expense ratio. However, because the expense ratio is included in the fund’s return, we can look back over this past year to see what was actually saved by a difference in returns.

Here is a retrospective estimate of the savings our clients may have experienced using returns from January 1, 2022 through December 31, 2022.

Country (Ticker Symbols)	Franklin 2022 Return	iShares 2022 Return	2022 Difference	Marotta Amount Invested	Savings
Australia (EWA vs FLAU)	-5.52%	-5.74%	0.22%	$6,807,656	$14,977
Canada (EWC vs FLCA)	-11.91%	-12.77%	0.86%	$5,349,158	$46,003
South Korea (EWY vs FLKR)	-27.52%	-26.70%	-0.81%	$3,365,793	-$27,600
Switzerland (EWL vs FLSW)	-18.14%	-18.57%	0.43%	$6,254,000	$26,892
Taiwan (EWT vs FLTW)	-27.51%	-28.75%	1.24%	$7,338,910	$91,002
United Kingdom (EWU vs FLGB)	-1.29%	-5.13%	3.84%	$5,457,948	$209,585
TOTAL			1.04%	$34,573,465	$360,860

 

The estimated advantage of Franklin funds during 2022 was 1.04% or $360,860.

A fund’s return is influenced by many different factors. The iShares funds are based on the MSCI index while the Franklin funds are based on the FTSE index. These funds have slightly different holdings, which can influence returns. And a fund doesn’t always follow its index exactly. These issues are not a concern when we are choosing a country specific investment. This year the lower expense ratio performed about 2.5 times what we would have expected.

Reducing expense ratios by a theoretical 0.42% is a significant result. It is good to know that what works in theory has also worked even better in practice.

Photo of the United Kingdom by Josh Withers on Unsplash. Image has been cropped.