Many of the costs of owning exchange traded funds (ETFs) are right there for you to see. But there are other less obvious ones that you need to understand before you buy.
Robert Broadwell, V.P of iShares, for Gulf Times agrees: every ETF investor needs to consider the total cost of ownership and the mechanics of trading ETFs.
First off, ETFs are traded on an exchange or over the counter through brokers by accessing a direct market access (DMA) broker platform or through an authorized participant. ETFs offer intraday trading opportunities and require no minimum holding periods or sales charges if you decide to sell the ETF. [Understanding ETF Liquidity.]
- The total cost of ownership (TCO) include explicit costs, such as total expense ratio, commissions and custody. These are costs that can easily be determined by looking at fact sheets and brokerages.
- There are implicit costs, as well. These costs aren’t as readily apparent and are variable. They include things like bid-ask spreads, tracking difference as compared to the underlying index and taxes. [Does Your ETF Own Derivatives? How to Tell.]
The cost of commissions has been dealt with to some degree as brokerages slash or even eliminate ETF trading costs.
While it is easier to just look up the explicit costs associated with an ETF, it is essential to consider all costs that come with an ETF, including implicit costs. Doing that before you buy could not only save you from surprises later, but save you money.
For more information on ETFs, visit our ETF 101 category.
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.