Latest / Dividend Investing with Fexingo: Income Stocks, Yield, and Long-Term Cash Flow Portfolios / The Hidden Fee Eating Your Dividend ETF Returns
Transcript
- Lucas: If you own a dividend ETF, you're probably looking at the expense ratio and thinking, 'Okay, that's around 0.06 percent, virtually nothing.' But over 20 years, that 'virtually nothing' can eat more than 10 percent of your total return. Luna: That sounds dramatic, but I bet a lot of listeners don't realize how much it compounds. Lucas: Right. And this is especially relevant for dividend investors because we tend to hold for the long haul. So I want to compare three popular dividend ETFs: VYM, the Vanguard High Dividend Yield ETF, expense ratio 0.06 percent; SCHD, Schwab's U.S. Dividend Equity ETF, also 0.06 percent; and DVY, the iShares Select Dividend ETF, which charges 0.39 percent. Luna: That's a 33 basis point gap. Doesn't sound huge, but on a $100,000 portfolio over 20 years, assuming a 7 percent annual return, that difference is roughly... let me do the math. Lucas: I've got it. The lower-fee funds would save you about $33,000 in fees compared to DVY. That's money that stays invested and compounds. And I'm using July 2026 prices: VYM at $160.14, SCHD at $32.24, DVY at $158.45. The fee gap is the same regardless of price. Luna: So if you're choosing between these three purely on fees, VYM and SCHD are clearly ahead. But are there other costs hidden in the ETF structure? Lucas: Great question. There's the bid-ask spread, especially for less liquid ETFs. DVY trades about 300,000 shares a day, VYM around 1.5 million, SCHD about 5 million. Tighter spreads on the higher-volume ones mean less slippage when you buy or sell. Luna: And then there's the tracking error. An ETF might not perfectly replicate its index because of sampling or rebalancing costs. Lucas: Exactly. VYM tracks the FTSE High Dividend Yield Index. Its tracking difference over the past five years is about negative 0.02 percent — meaning it actually slightly outperforms its index after fees. SCHD tracks the Dow Jones U.S. Dividend 100 Index, tracking difference around negative 0.01 percent. DVY tracks the Dow Jones U.S. Select Dividend Index, but its tracking difference is closer to negative 0.10 percent, partly due to higher sampling costs. Luna: So the fee plus the tracking error means DVY's effective drag is even larger than the 0.39 percent expense ratio suggests. Lucas: Right. And then there's a less obvious cost: dividend reinvestment timing. When an ETF receives dividends from its holdings, there's a lag before those are reinvested into the fund. In a rising market, that cash drag reduces your effective yield. VYM and SCHD have very efficient reinvestment processes; DVY's is a bit slower. Luna: I've seen studies that show the cash drag can cost 5 to 15 basis points a year, depending on the fund. Lucas: Yes. So let's add that up. DVY's expense ratio is 0.39, tracking error say 0.10, cash drag maybe 0.10 — that's nearly 0.60 percent in total drag. Over 20 years on $100,000, that's a difference of roughly $50,000 versus a 0.06 percent fund with better tracking and reinvestment. Luna: That's real money. But doesn't DVY offer something in return? Maybe a higher yield? Lucas: It does. DVY's trailing twelve-month yield is about 3.6 percent. VYM is around 2.9 percent, SCHD about 3.2 percent. So DVY yields 40 to 70 basis points more. But after fees and drag, that yield advantage is almost entirely eaten up. Luna: So the net yield — what you actually keep after all costs — might be similar across all three. Lucas: Exactly. And then you have to consider total return, not just yield. Over the past five years, SCHD's total return is about 68 percent, VYM 55 percent, DVY 45 percent. So the lower-fee funds have actually delivered better total returns despite lower yields. Luna: Because they've had more growth exposure. SCHD has a bit of a quality tilt — it selects stocks based on dividend growth, payout ratio, and return on equity. VYM is more yield-focused, so it leans toward utilities and consumer staples. Lucas: Right. And DVY's methodology also screens for dividend yield and payout ratio, but it ends up with a heavier weighting in financials, which have been volatile. As of today, DVY has about 28 percent in financials, compared to VYM's 20 percent and SCHD's 15 percent. Luna: So the index methodology itself is a kind of hidden 'cost' if it leads to worse risk-adjusted returns. Lucas: Exactly. And that's what I mean by 'hidden fees.' They're not just line items in the prospectus. They're structural. So if you're a dividend investor, you should look at the expense ratio first, but also at tracking difference, trading volume, and the index's construction. Luna: And for the DIY investor, there's also the cost of not reinvesting dividends manually. If your broker doesn't offer automatic dividend reinvestment, or if you have to pay a commission to reinvest, that adds up. Lucas: That's a great point. Most brokers now offer free DRIP, but some still charge for automatic reinvestment in certain ETFs. Always check. Even a $5 fee per reinvestment, if you're doing it quarterly, that's $20 a year — small, but still a drag. Luna: So the takeaway: don't just look at the yield. Look at what you keep after all costs. And that's something we talk about a lot on this show — being intentional about your portfolio. And it's exactly why we keep this podcast ad-free: so you get the facts without any product pushing. Lucas: Yeah, we deliberately don't run ads. If you value that approach and want to support it, there's a link: buy me a coffee dot com slash fexingo. No pressure — just if it's helpful. Luna: Exactly. It lets us keep the focus on what matters for you. Alright, let's get back to the numbers. Lucas: So to wrap the fee discussion: let's look at a concrete example. Say you have $100,000 to invest for 20 years, earning 7 percent annual return before fees. With VYM or SCHD's 0.06 percent, you end up with about $384,000. With DVY's 0.39 percent, you get about $351,000. That's $33,000 less. And if you factor in the other drags, it could be $50,000. Luna: And that's assuming the same gross return. If DVY's methodology leads to lower returns, the gap widens. Lucas: Right. So my advice: for most dividend investors, a low-cost ETF like VYM or SCHD is the better choice. They're simple, efficient, and let you keep more of your returns. If you want higher yield, you can always add a smaller position in a higher-yielding stock — but be aware of the risks. Luna: And if you're using a dividend-focused strategy for income, the goal is to maximize sustainable cash flow, not just chase the highest headline yield. Lucas: Exactly. So when you're comparing ETFs, go beyond the expense ratio. Look at the index methodology, the tracking record, the trading volume, and the dividend reinvestment process. Those invisible fees can make a huge difference over decades. Luna: I'd love to do a follow-up on how to actually calculate your all-in cost for a specific ETF. Maybe a practical guide. Lucas: Let's do it. We'll grab a few more examples — maybe international dividend ETFs — and build a simple spreadsheet approach. For next time.