How ETFs Save on Fees
May 7th 2012 at 12:12pm by Tom Lydon
Investors are paying attention to costs and fees associated with exchange traded fund investing. There is a realization that investment costs are eating into actual principal or returns, so the less fees raked up, the better.
Morningstar says “costs have come down because of appreciation, inflows, and a shift to lower-cost funds.” [Not All ETFs are Created Equal]
According to Morningstar data, the average expense ratio for an international equity mutual fund is 0.93%. If one compares this to the iShares MSC Brazil Index Fund (NYSEArca: EWZ) and the Vanguard MSCI Emerging Markets ETF (NYSEArca: VWO), there is a combined expense of 0.79%, reports Benzinga on MarketWatch. [What are ETFs: Pros and Cons]
Don Miller for Resource Investor reports that high commissions, management fees and taxes can really cut into returns. ETFs have been an efficient tool to get around some of these costs, or lower them. Because of the lower fees associated with ETFs, they have become a popular choice for investors seeking broad market exposure.
The tax efficiency of an ETF is a large benefit to a cost conscious investor. Capital gains taxes are a major cost of mutual fund investing, and regardless which investor sells shares in such a fund, all shareholders pay. With ETFs, capital gains are not realized until the entire investment is sold, so these taxes are paid less frequently.
ETFs do charge less in management fees than mutual funds. The ETF is not actively managed so there is not a stock picker or manager to pay. This reduces the cost factor of an ETF dramatically. [Advisor ETF Usage Rose 10% Last Year]
ETFs are also more cost effective than single stock investing because it is a one-shot fee, for a basket of shares. With single stocks, every transaction is costly, and the commission fees add up.
Overall, ETFs have become recognized as a tool that can reduce trading costs and improve the overall performance of a portfolio.
Tisha Guerrero contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.