Note: This article is courtesy of Iris.xyz
By Shundrawn A. Thomas
Investors’ use of ETFs has significantly evolved since the product first launched in the early 1990s. Yet, despite that growing popularity, many investors – regardless of their level of sophistication – do not have a thorough understanding of the total cost of ownership of ETFs. The constant evolution of competing product strategies across the last few years has only added complexity to the issue.
We’ve prepared this paper to help advisors and investors better examine all of the costs that impact the ETF investing experience – advisors may want to share this paper with their clients. Our objective is to assist investors by explaining the differences between explicit, implicit and opportunity costs; highlighting how these costs interact with one another in practice; and demonstrating ways to evaluate different costs when selecting an ETF product.
THE EVOLUTION OF ETF USE
Early ETF adopters were institutional investors who saw the benefits of tax efficiency and intraday trading. Initially, ETFs were used to address short-term needs, such as asset transition management or “parking” a large but temporary amount of cash (cash equitization). Consequently, ETFs often only served as trading vehicles with the potential to provide investors with liquidity and low costs during periods of active trading.