Replicate expensive ETF yourselves?

[Steven.Davis]

From what I have read, early tracking funds were disappointing in their ability to track. Cointegration and management are needed to find and maintain a portfolio which actually tracks.
If your goal is simply to buy-and-hold a basket of overseas stocks, then perhaps looking into creating overseas accounts. I don't know the costs involved, but I know of some groups that do such things. There can be asset protection benefits and currency devaluation hedging.
ETFs are supposed to differ from mutual funds by being super-low fees and liquid. Are you sure that the liquid part doesn't matter to you?

 

[Claudius]

shortbleu,

You're probably underestimating the cost of holding individual securities.
There are additional fees associated with holding ADR's. Buying and holding stock on their home exchanges may also incur additional costs. It will certainly involve higher transaction costs.
While your investment strategy may be passive, you would have to actively monitor for any corporate actions taking place and decide whether or not to participate (more transaction costs).
There would also be a large amount of paperwork to go through every year.

EEM currently has holdings in 764 stocks. ie there average exposure to a single security is 0.13%. There largest single exposure (Samsung) is 2.47%.

A 30 stock portfolio will necessarily be riskier. You will likely either outperform or underperform by margins much greater than 0.7%

If you don't believe you can beat the market through active stock selection, I would buy the ETF.

 

[erumsf]

Quote from shortbleu:

Niche emerging markets ETFs like ECON, GXG or BRAQ have quite high Total Expense Ratio (over 0.75% per year). If you buy and hold these ETFs for many years, the cost will quickly add up.

I was thinking about buying the underlying stocks themselves rather than the ETFs since most of the underlying stocks are quoted on the US market NYSE and can be bought via a US discount broker.

Say you want to invest $ 10,000, you use a cheap broker like Lightspeed which charges $ 0.40 / 100 shares, and you decide to buy the 20 underlying stocks that makes up the GXG ETF.
That will cost you about 20* 0.4 = $ 8.

Once you've done this, you can hold the 20 stocks for the next 10 years if you choose to do so and that would have cost you only $ 8.

If you buy the GXG ETF and hold for a year only, that will cost you $ 10,000 * 0.86% = about $ 86. It will cost lot more if you hold for many years, especially if the market is going up and you could end up paying well over $ 1,000 over 10 years to hold the ETF.

Am I right to say that it's a lot more cost effective to buy the underlying shares making up the ETF, rather than buying the ETF itself, or am I missing something.

PS: I might only be able to buy say 15-17 of the 20 underlying stocks making up GXG if only 15-17 stocks are tradable on NYSE, but still it will give me the emerging market exposure I am looking for.
Similarly for the ECON ETF, I might only be able to buy maybe 22-23 of the 27 stocks that make up 97.7% of the ETF if only 22-23 are tradable on Nyse but it does not bother me that much. I am more interested in a cost effective way to get exposure to niche emerging markets.