Additionally, as ETFs continue to attract more assets, fund providers have been able to cut their fees. More notably, Vanguard has been reducing expense ratios on a slew of their funds, which now have an average expense ratio of 0.17%. This has fueled a growing “price war” among ETF providers, but Vanguard simply states that they are “passing on economies of scale.” [ETF Price Wars: Round 2]
ETF investors also incur costs, or commission fees, when executing trades. However, investors can work around this through some trading platforms that allow their clients to trade commission-free on select ETFs, including Charles Schwab, E*Trade, Fidelity, Firstrade, Interactive Brokers, Scottrade, TD Ameritrade and Vanguard.
While costs are a major concern, as they will eat away any potential returns, investors should also consider their investment horizons. If you are a long-term investor, commission fees will be less of a concern, so you should take the time to find the right fund with the right expense ratio you are comfortable with. In contrast, if you are an active day trader, multiple ETF trades can rack up a hefty commission fee, so you might be better suited with a commission-free broker.
For past stories in this series, visit our “What is an ETF?” category.
Max Chen contributed to this article.