What Are the Average ETF Fees? (2024)

Exchange-traded funds (ETFs) have gained popularity among investors due to their ease of use, diversification benefits and lower costs when compared with traditional mutual funds. However, understanding the different fees associated with ETFs is important for investors to make informed decisions and maximize their long-term returns. ETF fees can vary significantly depending on the specific fund and provider, and they can have a substantial impact on investment performance over time. You may want to enlist the help of a financial advisor if you need more help determining how ETFs should fit into your portfolio.

Types of ETF Fees and How Much They Could Be

Fees can vary significantly depending on the specific ETF and the provider offering it, and they can have a substantial impact on investment returns over time. Being aware of these costs can help you choose ETFs with lower fees for your portfolio.

One of the most common types of ETF fees is the expense ratio, which represents the annual cost of owning an ETF as a percentage of the fund’s assets. This fee covers the ETF provider’s management and administrative expenses, and it is deducted from the fund’s assets on a daily basis. Expense ratios can range from as low as 0.03% for some passively managed ETFs to over 1% for actively managed or specialized ETFs. Factoring in 0.5% to 0.75% for actively managed fees is considered to be around the average.

Another type of fee that investors may encounter when buying or selling ETF shares is trading commissions. These fees are charged by brokers and can vary depending on the specific broker and ETF. Some brokers offer commission-free trading for certain ETFs, while others may charge a flat fee or a percentage of the trade value. A good range for these fees are $10 to $75 per trade.

Additionally, bid-ask spreads can impact the overall cost of investing in an ETF, particularly for frequent traders. The bid-ask spread refers to the difference between the highest price a buyer is willing to pay for an ETF share and the lowest price a seller is willing to accept. Wider spreads can increase the cost of trading ETFs, especially for investors who buy and sell frequently. The cost can range from around 0.004% to 0.11% of the trade value.

In addition to expense ratios, trading commissions, and bid-ask spreads, there are other potential costs associated with investing in ETFs that investors should be aware of. Some brokers may charge annual account maintenance fees if an investor’s account balance falls below a certain threshold. Additionally, some brokers may charge inactivity fees if an investor does not meet a minimum trading frequency or maintain a certain balance. Typically, any of these fees that are charged won’t be more than a couple hundred dollars per year.

ETF Fees vs. Mutual Fund Fees

The affordability of ETFs versus mutual funds depends on various factors such as the fees discussed above and some other fees that mutual funds might end up costing you. Here is a breakdown comparison of investment fees for both:

Expense ratios: ETFs tend to have lower expense ratios when compared to mutual funds. This is because ETFs are passively managed and typically track an index, while many mutual funds are actively managed, which can lead to higher management fees.
Trading costs: ETFs are traded on exchanges like stocks, so you’ll incur brokerage fees whenever you buy or sell them. Mutual funds, on the other hand, often have no trading costs if you buy directly from the fund company or through a platform that offers no-transaction-fee (NTF) funds. However, some mutual funds may have sales loads or redemption fees.
Minimum investment: Mutual funds may have higher minimum investment requirements when compared with ETFs. This can impact affordability, especially for investors with limited capital.
Tax efficiency: ETFs are generally more tax-efficient than mutual funds due to their unique structure and how they create and redeem shares. This can result in lower capital gains distributions for ETF investors.
Expense fees: Mutual funds might charge various fees like front-end loads, back-end loads and 12b-1 fees, which can increase the overall cost of investing in them. ETFs typically don’t have these types of fees.

Overall, ETFs are often seen as more affordable due to their lower expense ratios and potential tax advantages. However, the total cost depends on your specific investment strategy, brokerage fees and the funds’ structures and fees.

Choosing Between ETFs and Mutual Funds

When choosing between ETFs and mutual funds, there is much more to consider than just the fees. You may also want to note the following factors:

Investment objective: Determine your investment goals, risk tolerance and time horizon. ETFs and mutual funds may be suitable for different objectives. For example, ETFs could be better for short-term trading or passive investing strategies, while mutual funds could be preferable for long-term goals or active management.
Liquidity: ETFs trade on exchanges throughout the trading day like stocks, providing intraday liquidity. Mutual funds, however, are priced once per day after the market closes and are redeemed directly through the fund company, which can affect liquidity based on the fund type and size.
Minimum investment requirements: Check the minimum investment requirements for ETFs and mutual funds. Mutual funds may have higher minimums when compared with ETFs, which can impact accessibility for investors with limited capital.
Historical performance and track record: Review the historical performance and track record of the ETF or mutual fund, including risk-adjusted returns, consistency and manager expertise (for actively managed funds). Past performance doesn’t guarantee future results but can provide insights into fund management and strategy.

Bottom Line

Understanding ETF fees can help you optimize your investment returns. While ETFs generally offer lower expense ratios when compared with mutual funds, you should also consider other fees such as brokerage commissions, bid-ask spreads and potential tracking errors. Finally, don’t forget to evaluate your investment goals, trading frequency and cost considerations when picking ETFs that align with your financial objectives.

Tips for Investing

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You may want to see for yourself how much particular investments could change over time. You can use an investment calculator to help you make that determination.