When calculating the costs of owning an exchange traded funds, investors have to figure in other factors other than the explicit annual expense ratio.
Ron DeLegge for Minyanville points out that there are three inputs investors should use to estimate an ETF’s costs.
For starters, investors should look at the operating expense ratio. The expense ratio is reported in percentage terms and represents the ongoing fee that an ETF charges for managing the day-to-day operating costs. Investors should be aware that new ETFs will come with a temporary fee waiver, which help lower the expense ratio for a limited period to help attract investor money. [Why a Cheap ETF Isn’t Always Better]
According to XTF data, the average expense ratio of U.S.-listed ETFs is 0.61%, with the cheapest broad index-based ETF charging as little as 0.04%.
ETF investors should also consider the bid/ask spread of an ETF trades. The bid/ask spread, or simply the spread, is the difference between the bidding price and asking price of a security, which is determined by basic market supply and demand. More buyers translates to more bids and more sellers translates to more asks. Typically, the asking price will be higher than the bidding prices, or the number of sellers usually exceed the number of buyers. [The Bid/Ask Spread]