How do ETF fees work? (2024)

FAQs

How are fees for ETFs paid? ›

Investment management fees for exchange-traded funds (ETFs) and mutual funds are deducted by the ETF or fund company and adjustments are made to the net asset value (NAV) of the fund daily. Investors don't see these fees on their statements because the fund company handles them in-house.

Investment fee

It's taken as a percentage of an investor's stake in an ETF. An investor with a $10,000 stake in an ETF charging 1% would pay $100 in fees paid per year. However, you won't see this charge on your brokerage account. It is automatically taken from your ETF as part of the unit price.

The price of an ETF may deviate from the NAV of the ETF due to changes in the supply or demand for an ETF at any single point in time. The market price will typically exceed the NAV if the fund is in high demand with low supply. The NAV will generally be higher if the fund has a high supply with little demand.

Active ETFs don't have sales loads or 12b-1 fees. Their average fee (0.65%) is 36% cheaper than that of the average active mutual fund. Flexible trading. Investors can buy or sell active ETFs throughout the trading day.

Exchange-traded funds (ETFs) have embedded fees like the ones attached to mutual funds, and those fees are not tax deductible directly on your tax return.

Understanding a No-Fee ETF

Brokers offer to complete these trades for free in the hope of attracting new clients, who will also conduct more profitable trades with the same broker. No-fee ETFs can also make money by lending stock or offering lower interest on cash funds.

Expense Ratios in ETFs

Such costs can vary markedly depending on the fund's size, the investment strategy, and investment category. Usually, the average for passively managed ETFs and mutual funds is between 0.05% and 0.3%. Meanwhile, for actively managed funds, the average is between 0.5% and 1%.

For most investors, ETF trades take place with other investors, and not with the fund company itself. That means the fund company doesn't have to process your order; doesn't have to mail you the same documents; and doesn't have to go into the market to process your order. Less work = lower costs.

Compare the market price to the NAV to determine if the ETF is trading at a premium or discount to its NAV. If the market price is higher than the NAV, the ETF is trading at a premium. If the NAV is lower than the price, the ETF is trading at a discount.

ETFs typically have an expense ratio of 0.05%. An investor can determine the expense ratio by dividing the annual expenses of the investment by the fund's total value, though the expense ratio is also typically found on the fund's website.

Who sets the price of an ETF? ›

But unlike with mutual funds, ETF investors don't transact at NAV. Instead, ETF prices are determined by the market.

For most individual investors, ETFs represent an ideal type of asset with which to build a diversified portfolio. In addition, ETFs tend to have much lower expense ratios compared to actively managed funds, can be more tax-efficient, and offer the option to immediately reinvest dividends.

ETF fees are accrued daily, which means they are reflected in the daily price of an ETF; however, the fees are typically deducted from fund assets on a monthly basis. From the investor's perspective, ETF fees are not directly paid like a monthly bill. Instead, they are reflected in a fund's net return.

*Vanguard average ETF and mutual fund expense ratio: 0.08%. Industry average ETF and mutual fund expense ratio: 0.44%. All averages are asset-weighted.

You'll typically pay a commission each time you buy or sell an ETF—but not always. Keep in mind, the smaller your investment and the more frequently you trade, the more impact these commissions will have on your bottom line.

Typical management fees are taken as a percentage of the total assets under management (AUM). The amount is quoted annually and usually applied on a monthly or quarterly basis. For example, if you've invested $10,000 with an annual management fee of 2.00%, you would expect to pay a fee of $200 per year.

Brokerage, STT, and Other Charges

The average brokerage charge on purchasing ETFs is 0.01% of the turnover value. There are certain charges that the SEBI levies on the purchase of stocks from an exchange. Since ETFs also trade like stocks and are listed on the exchange, ETFs attract such charges from SEBI.

An ETF owns and manages a portfolio of assets. If those assets pay dividends or interest, the ETF distributes those payments to the ETF shareholders. Those distributions can take the form of reinvestments or cash. ETFs that position themselves as dividend funds generally opt for cash distributions over reinvestments.