Beyond Fees: A True Approach to Portfolio Building

Fees are just one input in the investment equation not the outcome. Once portfolios go beyond simple market beta exposure, other variables like portfolio composition, factor tilts, dynamic adaptability, and exposure design, play a much greater role in determining performance.

Let’s explore real data to understand why focusing exclusively on fees can lead to cost-efficient but goal-inefficient portfolios.

Plain Beta Exposure — Where Fees Make the Most Sense

The case for low-cost investing is strongest in plain market beta, a passive, index-based exposure to the overall market. Here, the objective is straightforward: replicate market returns efficiently with little or no material changes in overall composition.

Here, both the ETFs deliver broad U.S. equity exposure to Largest 1000 US stocks by market capitalization and performance differences are minimal, but largely driven by fee differential.

The lower-fee fund (VONE) performs slightly better than IWB, which reinforces that in commoditized beta products, cost efficiency is indeed relevant.

When the exposure is identical, saving on fees directly improves net return. This is where the “low-fee advantage” narrative holds true.

In plain beta investing, where the product and exposure are nearly interchangeable, lower cost is logical.

Focused Market Beta Exposure — When Higher Fees Still Win

Now let’s look at the focused market exposures and see how fees begin to matter less and exposure and allocation weigh more on overall outcome. Take a look at two technology-focused ETFs. Both designed to capture the same sector or theme around technology focused companies, but built differently.

Despite IYW having more than four times the fee of VGT, it outperformed across all periods.

The reason lies in portfolio composition:

· VGT holds a broader mix of large- and mid-cap technology companies.

· IYW is more concentrated in dominant tech leaders such as Apple, Microsoft, and NVIDIA. These are the names that disproportionately drove returns during this cycle.

Despite its higher cost, IYW’s exposure mix was more favorable to market dynamics, resulting in stronger long-term performance.

This example highlights a critical truth that a higher fee doesn’t necessarily penalize returns if what you own delivers better exposure to the underlying market drivers. So, when diving into investing outside of pure broad market and into more focused exposures, the overall allocation, composition and investment strategy of the fund matters more than the fees. As fees start to become less relevant and driving force behind performance outcome.

Specialized Systematic Strategies — When Paying for Process Pays Off

Let’s move out a little further than the market and focused exposures to more specialized strategies. We will investigate strategic and systematic ETFs, those designed to deliver outcomes beyond raw beta, such as improved risk-adjusted returns or dynamic factor exposure.

Despite higher fees, DYNF outperformed significantly, particularly over 3 years.

This is not luck. The performance difference stems from systematic, adaptive portfolio construction by actively adjusting factor exposures in response to shifting market and macro conditions.

Here, the higher fee reflects added process sophistication not inefficiency. We can clearly see how higher fees are not impacting returns but actually delivering value.

The Key Insight — Fees Are Not Strategy

Fees tell you what you pay, not what you get.

A portfolio’s performance and resilience depend primarily on exposure, structure, and purpose and not on minimizing costs alone.

Overemphasizing fees risks creating cost-efficient but goal-inefficient portfolios.

They may reduce expense drag, but fail to align with an investor’s objectives, constraints, or risk appetite. By optimizing solely for fees, investors may inadvertently optimize away the strategy that could best serve their goals.

When Fee Sensitivity Makes Sense (and When It Doesn’t)

Fee sensitivity is useful when:

🔹 Comparing broad, commoditized exposures (e.g., S&P 500, total market ETFs).

🔹 Building the core of a portfolio with passive beta.

Fee sensitivity is less relevant when:

🔹 Evaluating thematic, sector, factor, or dynamic exposures, where differentiation drives returns.

🔹 Assessing portfolios that adapt to market regimes or manage risk systematically.

Low cost works for commoditized beta. Beyond that, value and design trump price.

The Advisor Perspective

For advisors, this distinction is critical. Clients’ financial goals, constraints, and risk tolerances are unique, and portfolios designed around cost alone often fail to deliver desired outcomes.

Low-cost beta funds can form the foundation, but effective portfolios require strategically selected exposures that improve diversification, adaptability, and compounding resilience.

The guiding question should be:

“What combination of exposures delivers the right balance of return, risk, and purpose for this client?”

The Bottom Line

Fees should inform investment decisions, not dictate them. For plain beta exposures, cost efficiency is important.

For focused or systematic strategies, higher fees often reflect research, sophistication, and strategic design and can deliver superior outcomes.

Market beta and index ETFs are commoditized products. However, each client’s objectives and risk preferences are unique, and portfolios must reflect that uniqueness and not commoditized approach with cookie-cutter low-cost funds.

ACQM’s Approach — Adding Intellectual Edge

At ACQM, our strategies are built by dynamically combining exposures across different risk spectrums, allowing portfolios to align with individual client objectives and risk profiles.

We don’t just license models, we provide the intellectual framework for advisors to construct portfolios that adapt to market conditions while staying true to client goals.

Connect with ACQM to explore how our research-driven, adaptive strategies can become the intellectual edge to your advice for your clients.