ETF fees explained: Expense ratios and other costs

What are ETF fees?

ETF fees are the costs investors pay to get exposure to Exchange-Traded Fund shares. These charges cover the operational expenses of the fund, like portfolio management, marketing and administration.

Unfortunately, every dollar you pay in fees is a dollar that isn't compounding in your account. High fees can act as a ‘drag’ on your performance. For example, a fund charging a 1% annual fee (which seems small) takes a much larger bite out of your returns than one charging 0.03%.

Unlike mutual funds, which often have sales loads or certain distribution fees, ETFs generally have lower overhead. They trade on an exchange like a stock, which changes how costs are structured and paid.

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Understanding expense ratios

An expense ratio is the annual fee an ETF charges its shareholders, expressed as a percentage of the fund's assets. So, if you invest $1,000 in an ETF with a 0.1% expense ratio, the cost is $1 per year. Again, this sounds low, but it’s not the only amount you’ll pay.

What the expense ratio covers

This cost is deducted directly from the fund's Net Asset Value (NAV), so you won't see a separate bill. It covers:

• Management fees: Paid to the fund manager for overseeing the portfolio.
• Administrative costs: Expenses for legal, accounting and compliance.
• Operational costs: Rent, technology and general business overhead.

Active vs. passive fees

The expense ratio usually depends on how the fund is managed. Passive ETFs track a specific index and typically have lower fees, often averaging below 0.1%.

In contrast, active ETFs involve professional managers making specific buy-and-sell decisions to beat the market. These require more research and labor, leading to higher average expense ratios of around 0.6%.

Other ETF costs to know

1. Trading commissions

Many traditional brokers charge a flat fee every time you trade. However, Crypto.com Stocks offers zero-commission ETF trading, allowing you to keep more of your capital working for you.

2. Bid-ask spreads

The bid-ask spread is the difference between the highest price a buyer is willing to pay (called the bid) and the lowest price a seller will accept (called the ask).

• Liquidity matters: High-volume ETFs usually have narrow spreads.
• Cost impact: If an ETF is priced at $100.00 (bid) and $100.05 (ask), this spread means that if you buy, you would effectively ‘lose’ $0.05 per share if you decided to immediately sell.

3. Tracking error

Tracking error is the difference between the performance of the ETF and its underlying index. While not a direct fee, a high tracking error means the fund is underperforming its benchmark, which is a real cost to you, the investor.

4. Tax considerations

ETFs are generally more tax-efficient than mutual funds. However, they can still trigger capital gains distributions. This can reduce your net returns if held in a taxable account.

How ETF fees affect long-term returns

Fees might seem small in the short term, but they can have a massive impact due to the compounding effect. When you pay a fee, you lose the principal amount and all the future earnings that money could have generated.

Let’s assume an initial investment of $100,000 with a 7% average annual return over 30 years:

• At a 0.05% fee, your portfolio grows to approximately $749,000.
• At a 1% fee, your portfolio grows to approximately $574,000.

In this hypothetical scenario, the 1% fee equals over $175,000 in lost wealth compared to the lower-cost option.

How to compare ETF fees

Comparing costs requires looking at the total cost of ownership, not just the expense ratio.

1. Read the prospectus: Locate the fees and expenses section to see the gross and net expense ratios.
2. Check average spreads: Look at the fund’s historical bid-ask spread on financial research websites.
3. Evaluate trading costs: Factor in whether your broker charges a commission. Remember, Crypto.com Stocks offers zero-commission ETFs, which can simplify this comparison by removing the trading fee variable entirely.

Ready to invest?

1. Sign up with Crypto.com and open your Crypto.com Stocks account.
2. Deposit funds securely with free* bank transfers, card, Apple Pay or Google Pay.
3. Explore 12,000+ US stocks and ETFs commission-free.

FAQs about ETF fees

Do ETFs have hidden fees?

While ETFs offered by reputable brokers are generally transparent, ‘hidden’ costs like bid-ask spreads and tracking errors aren't listed in the expense ratio but still affect your total return.

What is a good ETF expense ratio?

For passive index funds, an expense ratio below 0.1% is considered very good. For actively managed funds, 0.5% to 0.75% is common.

Are ETFs cheaper than mutual funds?

Generally, yes. ETFs usually have lower administrative costs and don't charge 12b-1 marketing fees or sales loads common in mutual funds.

Do all ETFs charge the same?

No, fees vary widely based on the complexity of the strategy, the asset class (like emerging markets vs. US stocks) and the fund provider.

* Other fees may apply.

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