What Do ETF Fees Pay For?

ETFs, or exchange-traded funds, are an increasingly popular investment tool for people looking to easily diversify their portfolios. In the US, which has the largest ETF market in the world, there were $3.4 trillion in total net assets in ETFs at the end of 2017.

Exchange-traded funds are typically considered a low-cost way for investors to build their own portfolios and access assets they wouldn’t otherwise be able to access. But ETF fees are a big consideration, as they deduct from the overall return you get on your investment.

When are ETF management fees charged? How are ETF fees calculated? Understanding this can help you determine how much you should be paying in fees and if ETFs can help you work toward your financial goals.

What Are ETFs?

An ETF is a basket of securities—typically stocks and bonds—that lets an investor access a broad range of investments and markets. Buying an ETF gives you proportional access to all the stocks and bonds in that fund, without having to purchase each individually or make the individual asset minimums.

Because an ETF bundles many investments together, it shares many similarities with a mutual fund. An ETF, however, is bought and sold on an exchange, so it can be traded throughout the day instead of just once a day. This makes ETFs more flexible.

There are also a wide range of ETFs offered, available in almost every market . And while ETFs can be actively managed, they’re more often passive investments that track a specific index or market—meaning there’s no investment manager making active trading decisions. Instead, the fund aims to track the returns on a specific market. For example, an ETF that tracks a market index, like the S&P 500, would aim to carry a basket of securities that mirror the S&P 500. A biomedical ETF aims to carry a basket of biomedical stocks that seek to mimic the returns of that industry.

Although there are ETF management fees and trading costs, ETFs can provide a lower cost way to easily diversify and build a portfolio that meets specific needs and goals. However, before you invest in ETFs, it’s a good idea to know what fees will be charged and when.

ETF Fees Overview

Most of the time, you pay a broker fee on each trade—i.e. every time you buy or sell an ETF through a brokerage or online broker. ETFs also have expense ratios, like mutual funds, calculated as a percentage of the assets. ETFs, however, do not have some of the other management fees that mutual funds have. And in general, actively managed ETFs cost more than passively managed ETFs .

How are these ETF fees calculated? It can seem a bit complicated, but don’t let that overwhelm you.

The first thing you may want to consider is the ETF price. It’s not technically a fee, but it is part of how much the ETF will cost. An ETF’s net asset value —sometimes called its NAV—is calculated by taking the current value of the fund’s net assets (its value minus its liabilities). For traditional mutual or index funds, the total NAV value divided by the total number of existing shares serves as the share price—the price at which you can buy one share of the fund.

For ETFs, it works slightly differently. Because an ETF can be bought and sold throughout the day, like a stock, its price per share is determined by supply and demand—though it’s often very close to the NAV price. Some research suggests that when the difference between the net asset value and the actual price varies too much it leads to higher costs and some slippage in the amount of return on the fund.

The next thing to consider is the brokerage commission. Because ETFs are bought and sold like stocks, you may pay a broker fee per trade whether you use a traditional broker or an online brokerage. These per-trade fees can range from around $8 to $30 , although there are brokers who now offer free trading as well. A broker trade fee is per trade, so if you buy and sell frequently it can add up. You will also have to pay brokerage fees when you add cash to an ETF, so these could also add up if you’re frequently adding small amounts of cash.

ETF management fees are the main fees you pay on ETFs. These are also called the expense ratio and are paid to compensate the fund manager for overseeing and administering the fund. The expense ratio is an ETF fee based on a percentage of total assets. For example, if an ETF has an expense ratio of 0.5%, then that means you pay 0.5% worth of assets on an annual basis. For $1,000 invested in an ETF for the year, you’d pay $5. Sometimes this is expressed in basis points . A 0.5% fee is expressed as 50 basis points.

When Are ETF Fees Charged?

Because the brokerage fee is paid per trade (or per transaction), it’s paid at the time of buying or selling and it’s paid by you upfront.

On the other hand, the expense ratio ETF fee is deducted directly from the fund’s assets. An investor receives the returns on the fund minus the fees. That means if your ETF has a 10% return and 0.5% expense ratio, then you’d see a 9.5% return.

Can You Avoid Paying ETF Fees?

In general, because ETFs are passively managed, they tend to have lower expense ratios than mutual funds. ETFs also don’t charge load fees, which mutuals typically do. ETF expense ratios generally don’t go above 2.5%, while mutual fund expense ratios can go up to 20%. That’s because if ETFs track an index, then there’s often less management, research, and oversight needed to operate the fund. The fees on ETFs have also continued to come down this year.
However, the lowest cost ETFs aren’t always the best ETFs to buy. You may want to consider the quality of the ETF, how it’s managed, and what it’s invested in, as well as how it fits with your overall financial plan.

Before you invest, you may want to consider your overall financial plan and determine an asset allocation that meets your needs. You could then invest in ETFs that match your desired mix of assets. Or, if you’re looking for more guidance, SoFi Invest can offer personal advice on ETFs and whether they should be a part of your portfolio.

Purchasing ETFs

SoFi Invest offers both active and automated investing, which let you either make your own trades or opt for a diversified portfolio built around your risk tolerance and financial goals. SoFi invests in a range of ETFs and has launched its own ETFs with fees waived for at least the first year.

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC .
Fund Fees
If you invest in Exchange Traded Funds (ETFs) through SoFi Invest (either by buying them yourself or via investing in SoFi Invest’s automated investments, formerly SoFi Wealth), these funds will have their own management fees. These fees are not paid directly by you, but rather by the fund itself. these fees do reduce the fund’s returns. Check out each fund’s prospectus for details. SoFi Invest does not receive sales commissions, 12b-1 fees, or other fees from ETFs for investing such funds on behalf of advisory clients, though if SoFi Invest creates its own funds, it could earn management fees there.

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