Investment management fees for exchange-traded funds (ETFs) and mutual funds are deducted by the ETF or fund company and adjustments are made to the net asset value (NAV) of the fund daily. Investors don't see these fees on their statements because the fund company handles them in-house.
Management fees are just a component of the total management expense ratio (MER), which is what should concern investors.
Key Takeaways
- Management fees include expenses ranging from manager salaries to custodial services and marketing costs.
- These fees reduce the value of an ETF investment.
- They're a subset of the total management expense ratio (MER).
- MERs are generally lower for passive funds than for active ones.
- Higher fees can have a large impact on overall investment returns because fees compound over time.
ETF Fees
An ETF company incurs expenses ranging from manager salaries to custodial services and marketing costs as part of its normal operations. They're subtracted from the NAV.
Assume an ETF has a stated annual expense ratio of 0.75%. The expected expense to be paid over the year is $375 on an investment of $50,000. The investor would slowly see their $50,000 move to a value of $49,625 over the year if the ETF returned precisely 0% for the year.
The net return the investor receives from the ETF is based on the total return the fund earned minus the stated expense ratio. The NAV would increase by 14.25% if the ETF returns 15%. This is the total return minus the expense ratio.
The Impact of Fund Expenses
Fees are important because they can have a huge impact on your ultimate returns. A $100 investment that grows by 7% a year would be worth $197 in 10 years without fees. Subtract a 1% annual fee and the result is $179. Fund expenses have eaten up approximately 10% of your potential portfolio. Fees compound over time just as portfolio assets do so the longer the investing period, the bigger the loss.
Ways to Minimize Expenses
Some funds are more expensive than others. A critical distinction is passive versus active management.
Passive managers simply mimic the holdings of a stock index, often the S&P 500, sometimes with minor deviations. These "index fund" or "index ETF" managers periodically rebalance fund assets to match the benchmark index. This incurs trading costs but they're usually minimal.
As the name suggests, active managers take a greater hand in choosing fund assets. This requires expensive research departments that passive funds don't have and usually a higher level of trading that elevates transaction costs. All this is reflected in the MER.
The asset-weighted average expense ratio dropped from 0.61% in 2021 to 0.59% in 2022, the last full year for which statistics are available. Expense ratios for passive funds declined from 0.13% in 2021 to 0.12% in 2022.
Studies of ETF Fees
Morningstar estimates investors saved $9.8 billion in fund expenses in 2022, the last full year for which statistics are available. Investors are benefitting from less expensive fund options as competition between fund companies increases.
Companies are moving toward fee-based compensation models and away from traditional transaction-based models, according to Morningstar. Customer rejection of costly funds is evident in net inflows and outflows. The cheapest 20% of funds saw inflows of $394 billion in 2022. The remaining 80% saw outflows of $734 billion.
The popularity of low-cost robo-advisors is another factor driving down the cost of wealth management services and putting pressure on fund companies to keep expense ratios low. Many investors are responding favorably to the rapid digitalization in investment services and the ability to build high-quality portfolios for a minimal cost using easily accessible online platforms.
The worldwide robo-advisory market is expected to be valued at $129.5 billion by 2032, growing at a compound annual growth rate (CAGR) of 32.5% between 2023 and 2032.
Which Funds Have the Lowest Fees?
Passively managed funds like index ETFs tend to have lower fees than actively managed mutual funds. Broad-based funds tend to have lower expenses than narrowly-based funds because their management costs are distributed among a larger investor base. Vanguard claimed the lowest expense ratio among all fund managers in 2022 with average asset-weighted expenses of 0.08%.
How Much Do Brokers Charge for ETFs?
Brokerage houses may charge a commission for ETF trades just as they charge for any other market-traded security. These fees are typically around $20 per trade or less but they can add up over time if the investor trades ETFs often.
What's a Good Fee for ETFs?
The average asset-weighted expense ratio for passively managed funds was around 0.37% in 2022, according to research by Morningstar. Investors should expect to pay around $3.70 for management costs for every $1,000 of investment value.
The Bottom Line
ETF fees pay for the expenses of managing an exchange-traded fund. They include custodial costs, management salaries, and the costs of buying and selling securities. These are typically lower than the expenses for actively managed funds but they can be significant if you trade often or if the fund does poorly. These costs are automatically deducted from the fund's assets and they're reported in the fund's annual statements.
FAQs
ETF fees are accrued daily, which means they are reflected in the daily price of an ETF; however, the fees are typically deducted from fund assets on a monthly basis. From the investor's perspective, ETF fees are not directly paid like a monthly bill. Instead, they are reflected in a fund's net return.
How are ETF fees taken? ›
Investment management fees for exchange-traded funds (ETFs) and mutual funds are deducted by the ETF or fund company and adjustments are made to the net asset value (NAV) of the fund daily. Investors don't see these fees on their statements because the fund company handles them in-house.
What is fee expense ratio for ETFs? ›
The Average ETF Expense Ratio Is Lower Than Mutual Funds
The average expense ratio for index ETFs is typically lower than that of index mutual funds, historically 0.57% for ETFs versus 0.84% for mutual funds. Importantly, the higher costs of mutual funds can add up and impact portfolio returns over the long run.
How does ETF pricing work? ›
The price of an ETF share generally stays very close to NAV but if the share price is below the NAV, then the ETF is said to be trading at a discount. Conversely, if the ETF share price is more expensive than NAV, the ETF is said to be trading at a premium.
How much are ETFs transaction costs? ›
Transaction Costs (Trading Costs)
While the costs of ownership are more or less fixed and linked to owning shares in an ETF, transaction costs are only incurred when making a purchase or sale transaction. One of the most explicit of these costs is the commissions to be paid to brokers for making trades.
Are ETF fees automatically deducted? ›
ETF fees are accrued daily, which means they are reflected in the daily price of an ETF; however, the fees are typically deducted from fund assets on a monthly basis. From the investor's perspective, ETF fees are not directly paid like a monthly bill. Instead, they are reflected in a fund's net return.
Does Vanguard charge fees for ETFs? ›
Enjoy commission-free trades when you buy or sell ETFs (exchange-traded funds) online. You won't pay any extra fees to have one of our investment professionals place a Vanguard ETF® trade for you. It's easy to avoid most account service fees.
How is the expense ratio deducted? ›
The expense ratio in a mutual fund is indicated as a percentage of the total AUM (Asset under management), representing the fund's operating expenses. These expenses are deducted from the AUM to declare the fund's NAV (Net asset value) daily, thereby reducing the overall return from the mutual fund.
Are expense ratios automatically deducted? ›
The cost of an expense ratio is automatically deducted from an investor's returns. In fact, when an investor looks at the daily net asset value of an ETF or a mutual fund, the expense ratio is already baked into the number that they see.
Does Fidelity charge fees for ETFs? ›
$0.00 commission applies to online U.S. equity trades, exchange-traded funds (ETFs) and options (+ $ 0.65 per contract fee) in a Fidelity retail account only for Fidelity Brokerage Services LLC retail clients. Sell orders are subject to an activity assessment fee (from $0.01 to $0.03 per $1,000 of principal).
Compare the market price to the NAV to determine if the ETF is trading at a premium or discount to its NAV. If the market price is higher than the NAV, the ETF is trading at a premium. If the NAV is lower than the price, the ETF is trading at a discount.
Do ETFs have daily pricing? ›
Many investors appreciate the benefits of being able to trade ETFs throughout the day at prices that are updated continually. For others, the concept of being able to buy and sell a fund throughout the day is something they are still getting comfortable with.
What happens when ETF price gets too high? ›
The ETF shares' market value naturally fluctuates during the trading day. 8 The AP can step in and buy the ETF's underlying constituent components while simultaneously selling ETF shares if the market value gets too high compared to the NAV.
How do ETF managers make money? ›
Most ETF income is generated by the fund's underlying holdings. Typically, that means dividends from stocks or interest (coupons) from bonds. Dividends: These are a portion of the company's earnings paid out in cash or shares to stockholders on a per-share basis, sometimes to attract investors to buy the stock.
Do ETFs charge high fees? ›
ETFs have lower costs on average than passively managed mutual funds and don't charge 12b-1 fees. The expense ratio is the cost of the mutual fund, including any management fees, fees for expenses, and 12b-1 fees, and expressed as a percentage of the total assets under management.
Does Schwab charge for ETF trades? ›
Online listed stock and ETF trades at Schwab are commission-free. Online options trades are $0.65 per contract. Service charges apply for automated phone trades ($5) and broker-assisted trades ($25) for stocks, ETFs, and Options. Futures trades are $2.25 per contract8 for both online and broker-assisted trades.
How are expense ratios deducted? ›
An expense ratio is determined by dividing a fund's operating expenses by its net assets. Operating expenses reduce the fund's assets, thereby reducing the return to investors because the expense ratio is deducted from the fund's gross return and paid to the fund manager.
