Exchange traded funds (ETFs) are cheaper than mutual funds, on average. But it would be wrong to assume that this eliminates the need to pay attention to costs and find ways to slash them.
Many costs are smaller amounts. A 0.50% expense ratio there, an $8 commission there. But over time, these costs will eat into your returns by thousands of dollars over the years if you’re not paying attention.
Here are ways to make sure you’re paying as little as possible while still getting the best ETFs:
- Use limit orders. Mike Hogan for Barron’s agrees on this point. Limit orders enable you to specify the price you want to pay to trade a security. Market orders, on the other hand, execute orders at the next available price – and that price may not always be in your favor. [How a Stop-Loss Can Save You Dollars.]
- Look for liquidity. If you’re a smaller investor, you should pay attention to the size of funds you’re buying and look for those with greater assets and trading volume. Larger funds tend to have greater liquidity and narrower bid/ask spreads. If you’re placing a large order, though, contact an alternate liquidity provider or your broker for help with execution on any fund, even smaller ones. [All About Alternate Liquidity Providers.]
- Shop around for lower commissions. One of the more popular ways fund providers have attempted to lure dollars has been to decrease the costs associated with ETF purchase and ownership. Some providers offer free trades, many offer discounted ones. [Where to Go for Cheap ETF Trades.]
- Use the ETF Analyzer to sort all ETFs by expense ratio to find the lowest cost.
- Read the prospectus for other costs, such as tax rates. Some ETFs, such as physically-backed commodity funds, are taxed as collectibles. Other ETFs might shoot off capital gains. If you’re not sure, contact your accountant.
For more stories about ETFs, visit our ETF 101 category.
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.