2. Trading Fees – More and more brokerage companies are offering access to commission free ETF trades which can be a significant advantage in your total investment expenses. This is especially true for smaller accounts, where a trading fee as low as $8 to buy or sell can be cost prohibitive. Another advantage for commission free ETFs is that you can trade as often as you like and in whatever quantity you desire. This will allow you to scale in and out of positions with multiple orders or set stop losses and not worry about the impact of trading costs on smaller sized holdings.
3. Liquidity – I consider liquidity to be a “stealth cost” on an investment portfolio because it is easy to overlook. Often times ETFs that are thinly traded or have underlying holdings with low volume are at risk for scalping your hard earned money. This can occur when the bid/ask spread widens to abnormal levels or the market maker takes advantage of a drought in liquidity.
One way to avoid getting a bad fill on entering or exiting an ETF is to use limit orders to ensure that your trades are executed at the price that you desire. If your trade is not filled at a reasonable price, then you can adjust your limit order or walk away knowing that you dodged a bullet.
The Final Word
By analyzing these factors and comparing ETF products, you will be better equipped to find the lowest cost investments to access the sector or asset class that you desire. Index Universe has an excellent tool that allows you to screen ETFs in a specific category and then compare some of these important attributes.
However, remember that fees aren’t everything. Often times you will only have one or two ETF choices for a particular segment of the market that you want to get exposure too. An example of a unique fund with no competition in its asset class is the Market Vectors Gaming ETF (BJK) which has gained over 30% so far this year. In that case, it may be more important to set fees aside and forge ahead with an opportunity or dislocation in the market that will give you the best chance for big gains.
David Fabian is the chief operating officer at Fabian Capital Management LLC.