What’s this going to cost me? Depending on how an ETF’s portfolio is crafted, the fund’s expense ratio can vary. For instance, U.S. stock ETFs, which can be easily replicated, typically cost less than international stock ETFs where overseas markets are harder to access. Additionally, smart-beta and actively managed ETFs, which both utilize more sophisticated stock-picking methodologies, will typically cost more than traditional beta-index ETFs.
According to XTF data, the average expense ratio of U.S.-listed ETFs is 0.60%, with the cheapest one coming in at 0.04%. In contrast, the average expense ratio for an actively managed U.S.-listed ETF is 0.85%.
What other factors can affect returns? Blancato argues that investors should focus on the ETF’s liquidity. ETF liquidity is based on the number of ETF shares traded, along with the liquidity of the fund’s underlying market. [The Total Costs of Owning, Trading ETFs]
For more information on ETFs, visit our ETF 101 category.
Max Chen contributed to this article.