I’ve been doing some research in preparation for some adjustments to my investing. One of the things I’d like to do is to put some of my money into index fund ETFs.
If ETFs are similar (in terms of the holdings), then the biggest factor that will impact your return is the fees you pay for an ETF. Thus, it’s important to search for the lowest ETF fees you can find.
What Fees Can You Expect to Pay With an ETF?
Schwab, Vanguard, and TD Ameritrade all have some funds that are “Commission Free” ETFs. This means they can be bought and sold without paying a transaction fee.
Outside of the free ETF list, you will be required to pay a trade fee:
Charles Schwab = $8.95
Vanguard = $7 for the first 25 trades (assuming balance below $50,000)
TD Ameritrade = $9.99
Other ETF Transaction Fees:
Remember, you’ll pay this fee when you buy and when you sell your ETF. Depending on your needs/strategy, it would obviously be beneficial to focus on companies that have no fee ETF Exchange fees.
One often overlooked expense is what you pay as a fee to those who oversee/manage the ETF. There’s not a single company that provides these services for free. Everyone wants their cut.
Obviously, you’re better off if you can find the brokerage that charges the lowest operating expenses for the investment you’re considering. The lower the expense ratio, the more of your investment you’ll keep.
As an example, International Equity ETFs have the following operating expenses:
- SCHF (Schwab) .09%
- VEA (Vanguard) .12%
- EFA (iShares) .34%
- SCHF (Schwab) $9
- VEA (Vanguard) $12
- EFA (iShares) $34
When you buy an ETF, you don’t actually purchase it at the market price. Instead, there will be a difference between what you can buy an ETF for and its actual market price. That is the bid/ask spread. The same is true when you sell an ETF. They are small built in commissions.
The best example I can give is when you use a credit card overseas. There is an Interbank exchange rate, but companies don’t give that rate when they sell you currency. They make a small profit on top of the interbank rate. A similar thing happens with ETFs.
Here’s an example:
When researching for VOO, it lists the following: Bid = 69.6300 and Ask = 64.6400. That means if I buy, I’d pay a penny per ETF as part of the bid/ask spread.
That spread (difference) is where the brokerage will make money.
In addition to the other fees, you’ll want to check to see if there are any discounts based on account balances or even a minimum funding requirement. Will your brokerage offer discounted rates based on your total portfolio amount?
Finding ETFs With the Lowest Fees
- The biggest expense will be your commission fees. When possible, focus on no fee ETF purchases. If that’s not possible, then you need to find the brokerage with the lowest fees.
- If you are a buy and hold investor, then your next biggest fee will come in the form of operating expenses. If you trade more frequently, you may be more concerned about bid/ask spreads.
- If the prices are close, you’ll want to look into other fees/discounts that might tip the scale in one direction or another.
Are there other fees you consider when investing in ETFs?