Editor’s Note: This blog has been updated to include more recent data. It was originally published in October 2017.

Investing is a balancing act. Investment professionals need to ensure clients achieve their investment goals while also keeping an eye on portfolio costs. Achieving this balance is becoming more challenging as today’s low growth environment prompts investors to rethink their asset allocation strategy and keep a closer eye on fees as they strive to meet their investment goals.

One way to navigate this environment: ensure your portfolio is built on a well-diversified core and manage your fee budget so costs don’t erode your investment returns.

Diversifying your core

We often talk about the importance of a well-diversified portfolio core, but what do we mean when we say core? We’re referring to the long-term foundation of your portfolio that typically holds a mix of stocks and bonds. Your asset allocation decisions in the core, informed by your client’s risk tolerance, return expectations and time horizon, are the starting point for managing a portfolio’s risk and return. Today's core portfolios should also reflect an expansive investment universe.

By constructing a properly diversified, cost-efficient core, you can pursue specific investment goals—from generating income and managing risk to growing capital.

Core investing shouldn’t be costly

As the largest part of a portfolio, the core should never be the most expensive. When you focus on controlling costs in the core, your clients can keep more of their hard-earned returns.

To help build your well-diversified core, we created 15 ultra-low-cost SPDR® Portfolio ETFs™ that span US equity, international equity and fixed income asset classes. These ultra-low-cost ETFs have an average cost of just 6 basis points, 92% lower than the average US-listed mutual fund.1

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Source: Morningstar, State Street Global Advisors, as of 9/30/2018. The bar chart above shows the average expense ratio of the 15 SPDR Portfolio ETFs compared to the average expense ratio of all US-listed mutual funds which include both active and passive products.

That savings can add up quickly. Without taking into account the impact of compounding returns, a fee of 6 basis points on a $100,000 investment would cost $600 in fees over 10 years—compared to $7,600 in potential cost at a fee of 76 basis points.

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Source: Morningstar, State Street Global Advisors, as of 09/30/2018. The above uses an average expense ratio and is for illustrative purposes only. Actual fees paid by an investor will differ.

The bottom line: Costs matter and can accumulate over time, eroding a portfolio’s total return. However, if costs are under control in the largest part of the portfolio, investors can construct well-diversified, low-cost core exposures, providing the vital support needed to pivot confidently in any direction to pursue clients’ specific investment goals.

Be sure to check back in with SPDR Blog for my next post that outlines the four principles of core portfolio construction. To learn more about SPDR Portfolio ETFs™, visit our website.

1Morningstar, State Street Global Advisors, as of 09/30/2018. Based on their Morningstar category, the 15 SPDR Portfolio ETF have an average expense ratio that’s 92% less than all US-listed mutual funds which include both active and passive products. The average expense ratio of all-passive US-listed mutual funds is 0.32. SPDR Portfolio ETFs are 81% lower than the average passive US-listed mutual fund.


Active and Passive Strategies
An actively managed approach involves a manager choosing securities to build, say, a fixed-income portfolio, while a passive approach involves managing a portfolio so that it tracks an index such as the Bloomberg Barclays U.S. Aggregate Bond Index.

Asset Allocation
Asset allocation is an investment strategy that aims to balance risk and reward by apportioning a portfolio’s assets according to an individual’s goals, risk tolerance and investment horizon.

Basis Point (bps)
A unit of measure for interest rates, investment performance, pricing of investment services and other percentages in finance. One basis point is equal to one-hundredth of 1 percent, or 0.01%.