Exchange traded funds are touted for their lower expense ratios relative to actively managed mutual funds, and the corrosive effect of high fees on portfolios over the long term is well-documented. Most funds pay operating costs directly out of invested assets so investors are paying indirectly for various expenses.
The most common cost of investing in an ETF is the expense ratio. There are hundreds of ETFs trading in the market, and the expense ratio varies from one to another. A smaller, more niche fund tends to have a higher expense ratio due to lower asset levels, which in turn, is drawing from a smaller pool of capital to pay the expenses. As a fund grows, or the asset level gets higher, the expense ratio may become lower.
The indexed approach of most ETFs also means lower fees. [ETF Fees: How Low Can They Go?]
Since ETFs are bought and sold like stocks, broker commissions are another factor to consider.
Many providers are offering fee trades for investors that set up an in-house brokerage account. This helps alleviate any costs associated with trading, so long as the trades are done between the providers chosen ETFs. [Brokers Offer Commission-Free ETF Trades]
Other factors that impact an ETF’s operating expenses include taxes, legal expenses, accounting and record keeping.
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.