ETF Cost Efficiency

Exchange traded funds (ETFs) offer investors a cost effective path to access a large range of global markets. So, what type of costs should investors consider when investing in these funds? First off, because ETFs are bought and sold on an exchange like a single stock, each transaction is subject to the broker’s fee, reports Joanna Ching for Financial Times. If you are making frequent transactions or working with small amounts, trading fees could eat into any gains over time. Also, ETFs have expense ratios that can drag on total annual performance, but they are minor in comparison to other funds.

Despite these fees, ETFs offer the lowest expense ratios than any other investment tool around. Annual expenses are deducted from any dividends paid out, usually on a quarterly or annual basis.  As a rule, the more assets under management and the more interest there is for an ETF from investors, the more likely there will be a compression of fees.

Taxes offer another break with ETFs. In the U.S., ETFs generate fewer capital gains than mutual funds. Thus they are much more tax efficient.