Retail investors’ exchange-traded funds (ETFs) are a common investment tool. ETFs offer investors with a diversified portfolio of assets in a single easy-to-buy package, and they can be purchased and sold on an exchange as well as stocks. Nonetheless, there are fees associated with buying and selling ETFs that investors should be aware of.
The brokerage commission charged by brokers is the most obvious fee associated with purchasing ETFs. This can vary from a flat fee to a share of the ETF’s total cost. Some brokers charge reduced commissions on larger orders, so it’s important to shop around for the best deal.
ETFs may also incur other fees, in addition to the commission, depending on the fund’s characteristics. Many ETFs charge an annual management fee, which is used to fund operating expenses associated with the fund’s operation. Depending on the fund, these charges can range from 0.25 percent to 0.7 percent.
When buying and selling ETFs, transaction fees are also payable. These include items such as the bid-ask spread, which is the difference between the highest price someone is able to pay for an ETF and the lowest price someone is able to sell it for at. These costs can rise over time and should be factored in when estimating an ETF’s cost.
Lastly, if an investor buys or sells an ETF during market hours, it may also incur a market impact fee. This expense is a result of the ETF’s price fluctuation owing to the buy or sell order. Market impact fees can be significant and should be factored into account when determining the cost of an ETF.
Before making any investment decision, investors should make sure to understand all of the fees associated with buying and selling ETFs. The fees can add up quickly and have a major effect on an investor’s return. Before investing, it’s important to know the total cost of an ETF so that investors can make an informed decision about whether or not it is the right investment for them.
