There are several types of costs for investors. There’s the ETF expense ratio, commissions and, in certain funds, taxes.
ETF expense ratios may also vary from fund to fund. The average is around 0.50%, but some ETFs cost much more (and sometimes much less) than this, so it’s necessary to do a little digging. You can sort ETFs by expense ratio in the ETF Analyzer to see where the deals lie.
As a result of increased competition for the business of ETF traders, many brokerages have cut commissions and in some cases, made them entirely free. Vanguard and Charles Schwab are among the custodians doing this; check with yours to see if there are any deals and do some cost comparison.
Certain ETFs also have taxes attached. For example, commodity ETFs that hold futures are partnerships, which spread the costs across all investors in a given fund in the form of a K-1. Physically-backed commodity ETFs can be taxed as collectibles, which is 28% right now. There are also capital gains, which for ETFs are rare, but they do happen.
Knowing the ins and outs of costs can save you money and heartache later.
Large and Established
The larger ETFs, or those with greater assets under management, provide investors the safety of liquidity and tighter bid/ask prices. Furthermore, these funds also have higher average transaction volumes, which provide some protection against major swings in the fund’s prices as a result of institutional investments.
In the world of ETFs, most funds cover specific indexes, including large-caps, mid-caps, small-caps, growth or value indexes. Other funds focus on specific sectors, countries or regions. ETFs that invest in large-caps are generally the most liquid. Equities and fixed-income ETFs tend to be the most liquid of all asset classes.
Underlying securities that trade on large, well-known exchanges are also more liquid than those trading on smaller exchanges. ETFs that reflect those securities would also be more liquid.
Low-risk securities tend to be more highly traded, and as a result, ETFs that cover these securities would also have higher trading volumes and greater liquidity. Investors trading in ETFs with lower average trading volumes may be subject to higher bid-ask spreads, whereas institutional investors would likely trade in creation units.
By keeping these points in mind, you might find it easier to make a decision when you’re navigating the ETF universe.