5: ETF costs and fees

Pay close attention to costs and fees when comparing exchange-traded funds (ETFs) with mutual funds. There are several costs to consider:

  • Annual management fees. Annual fees on broad-market ETFs are often lower than comparable index mutual funds because ETFs don’t bear the same shareholder servicing costs. However, narrower specialized ETFs often have much higher management fees than broad market ETFs. Also note that some index mutual funds have been aggressively lowering fees to compete.
  • Annual management fees compared. Example: The SPDR Trust ETF (SPY), which tracks the S&P 500 index, charges a .0945% annual fee, compared to the Vanguard 500 Index (VFINX) mutual fund's .18% fee.
  • Brokerage commissions. Buying and selling ETF shares, like stocks, involves paying a commission for each trade. Although this can be as low as $10 or less, if you're buying small dollar amounts of ETFs, your brokerage commissions may outweigh the management fee savings, so you may be better off with an index mutual fund.
  • Sales loads and other fees. Since ETFs are bought and sold on exchanges, rather than distributed though brokers, they don't charge sales loads (they don’t have commission costs to cover). And unlike some mutual funds, ETFs do not levy 12b-1 fees for advertising and promotion costs.

More on ETF costs and fees:

  • How are ETF annual management fees charged? The annual management fee is built into the ETF's daily price. At the end of each trading day, the ETF sponsor levees a fee on the total assets invested in the ETF - a fee that annualizes out to the stated annual management fee.