Is the Cheapest ETF Always the Best? We Tested Every Category
Low fees are the most common piece of ETF advice in Australia. "Just buy the cheapest one." It's simple, intuitive, and often correct. But is it always true?
We tested it properly. We took 16 ETF categories on the ASX, grouped funds that track the same index or invest in the same asset class, and compared the cheapest fund to the best performer over 5 years. No apples-to-oranges comparisons — only like-for-like.
The Headline: Cheapest Won 44% of the Time
Across 16 like-for-like categories, the cheapest ETF was also the best performer in 7 out of 16 cases.
In the other 9, a more expensive fund in the same category delivered higher returns.
Where the Cheapest ETF Won (7 Categories)
These are the categories where the lowest-fee fund also delivered the highest return. Low cost = highest return.
Category | Winner | MER | 5Y Return | Runner-Up | MER | 5Y Return |
|---|---|---|---|---|---|---|
Australian Shares | 0.04% | +59.6% | 0.05% | +58.0% | ||
Nasdaq 100 | 0.48% | +107.9% | 0.51% | +77.3% | ||
Physical Gold | 0.15% | +219.3% | 0.40% | +216.5% | ||
Diversified Growth | 0.19% | +70.9% | 0.27% | +56.4% | ||
Small Caps | 0.30% | +47.5% | 0.39% | +45.7% | ||
ESG International | 0.18% | +86.5% | 0.55% | +63.3% | ||
Global Fixed Income | 0.20% | -2.4% | 0.49% | -4.7% |
The pattern: When funds hold essentially the same underlying assets (A200 vs IOZ vs STW, PMGOLD vs GOLD, VBND vs GBND), the cheapest fund wins by definition. Every basis point of fee comes directly off your return. This is where the "buy cheap" rule is ironclad.
Where the Cheapest ETF Lost (9 Categories)
These are the categories where a more expensive fund outperformed the cheapest — even though they invest in the same space.
Category | Cheapest | MER | 5Y Return | Best Performer | MER | 5Y Return | Gap |
|---|---|---|---|---|---|---|---|
International Shares | 0.09% | +88.1% | 0.18% | +92.5% | +4% | ||
S&P 500 / US Market | 0.03% | +95.0% | 0.04% | +107.0% | +12% | ||
Hedged International | 0.10% | +63.6% | 0.43% | +74.8% | +11% | ||
Australian Dividend | 0.20% | +54.3% | 0.25% | +72.7% | +18% | ||
Emerging Markets | 0.48% | +31.9% | 0.69% | +38.2% | +6% | ||
Global Quality | 0.35% | +72.9% | 0.40% | +100.2% | +27% | ||
Australian Property | SLF | 0.16% | +44.5% | 0.23% | +47.5% | +3% | |
Australian Fixed Income | 0.10% | +2.0% | PLUS | 0.32% | +7.2% | +5% | |
Cash | 0.07% | +14.2% | 0.18% | +14.7% | +0.5% |
Why Does This Happen?
Even within the same category, "like-for-like" isn't always truly identical. The reasons the cheapest fund lost break down into three buckets:
1. Different indices — different returns
VTS tracks the entire US market (~4,000 stocks). IVV tracks the S&P 500 (500 stocks). Both are "US equities," but IVV's concentration in mega-cap tech drove 12% higher returns over 5 years. IWLD includes MSCI World (with emerging-market adjacent countries), while VGS is pure developed markets. Same label, different underlying index, different result.
2. Different stock selection methodology
VHY screens for high-yield Australian stocks. SYI uses a different screen — MSCI's high-dividend methodology. They're both "Australian dividend ETFs" but hold different stocks in different weights. VHY's heavier bank weighting outperformed SYI's more diversified selection. QUAL and QLTY both target "quality" stocks, but use different factor definitions (MSCI Quality vs a different quality screen). Same concept, different execution.
3. Different credit/duration risk
PLUS holds higher-yielding credit-enhanced bonds. VAF holds plain government and investment-grade bonds. Both are "Australian fixed income" but PLUS takes more credit risk — which paid off over 5 years. BILL and AAA both hold cash deposits, but AAA's portfolio of bank deposits has slightly outperformed BILL's Treasury Bills.
The Scatter: Fees vs Returns Across 210 ETFs
When we plot every ETF with a 5-year track record, the correlation between fees and returns is -0.14 — essentially no meaningful relationship.
At every fee level there are winners and losers. What you hold matters more than what you pay.
The Rules That Actually Work
➡️Rule 1: When two ETFs track the same index, buy the cheapest. A200 vs IOZ vs STW? Buy A200. GOLD vs PMGOLD? Buy PMGOLD. VBND vs GBND? Buy VBND. This is the one situation where fee is the only differentiator and the cheapest always wins.
➡️Rule 2: When ETFs track different indices in the same space, fee is one factor — not the only factor. VGS vs IWLD, IVV vs VTS, VHY vs SYI — these are genuinely different products with different holdings, different index providers, and different return profiles. Picking the cheapest without understanding what it holds can cost you.
➡️Rule 3: The most expensive funds still tend to disappoint. While "cheapest" didn't always win, the data consistently shows that the most expensive quartile of ETFs (avg fee 0.91%) delivers the worst average returns. The fee advantage of the winners in our "cheapest lost" table is modest — typically 0.05% to 0.33% more. None of them are charging 1%+.
The bottom line: Fees matter enormously for like-for-like comparisons. But two ETFs labelled "international shares" or "Australian dividend" may be based upon different indexes and therefore hold very different stocks. Before you buy the cheapest, make sure you understand what's inside it.
Research every ETF mentioned in this article on ReviewETF — compare fees, performance, and holdings across all 464 ASX-listed ETFs.
Sources: CBOE Australia Monthly Funds Report (February 2026), ReviewETF.com.au. Analysis covers 210 ETFs with 5-year track records, grouped into 16 like-for-like categories.
No fund manager wrote this article. No issuer is paying for placement. This is independent analysis based on publicly available data.
This article is general information only and does not constitute financial advice. Consider your own circumstances and seek professional advice before making investment decisions.
