Investors can access exchange traded funds on a normal brokerage account throughout the day. Consequently, people should be aware of all the explicit and implicit costs of using the investment vehicle.
For starters, investors will typically compare the explicit fee or expense ratio to determine how costly it is to hold onto an ETF. Most have adopted ETFs due to their cheap fees, especially when compared to traditional mutual funds.
The average mutual fund charges 1.25%, writes Dan Moskowitz for Investopedia.
In contrast, there are 1,651 U.S.-listed ETFs with an average expense ratio of 0.59%, according to XTF data. Potential investors should be aware that various ETF products, even those that track the same investment strategy, have varying expense ratios, with broad beta-index ETFs showing the cheapest fees while more sophisticated and active strategies come with higher costs.
For those who opt to hold on to their ETFs in a long-term strategic portfolio, the expense ratio will be the major cost to consider as it is taken from the ETF’s annual performance.