What Are the Average ETF Fees?

Exchange-traded funds (ETFs) have gained popularity among investors due to their ease of use, diversification benefits and lower costs when compared with traditional mutual funds. However, understanding the different fees associated with ETFs is important for investors to make informed decisions and maximize their long-term returns. Average ETF fees can vary significantly, depending on the specific fund and provider, and they can have a substantial impact on investment performance over time.

Enlist the help of a financial advisor for help determining how ETFs can fit into your portfolio.

Types of ETF Fees and How Much They Could Be

ETF fees can vary significantly, depending on the specific ETF and the provider offering it. They can have a substantial impact on investment returns over time. Understanding these costs can help you choose ETFs with lower fees for your portfolio.

One of the most common types of ETF fees is the expense ratio, which represents the annual cost of owning an ETF as a percentage of the fund’s assets. This fee covers the ETF provider’s management and administrative expenses and is deducted from the fund’s assets on a daily basis.

Expense ratios can range from as low as 0.03% for some passively managed ETFs to over 1% for actively managed or specialized ETFs. Factoring in 0.5% to 0.75% for actively managed fees is considered to be around the average.

Another type of fee that investors may encounter when buying or selling ETF shares is trading commissions. These fees are charged by brokers and can vary, depending on the specific broker and ETF. Some brokers offer commission-free trading for certain ETFs, while others may charge a flat fee or a percentage of the trade value. Average ETF fees range from $10 to $75 per trade.

Additionally, bid-ask spreads can impact the overall cost of investing in an ETF, particularly for frequent traders. The bid-ask spread refers to the difference between the highest price a buyer is willing to pay for an ETF share and the lowest price a seller is willing to accept. Wider spreads can increase the cost of trading ETFs, especially for investors who frequently buy and sell. The cost can range from around 0.004% to 0.11% of the trade value.

In addition to expense ratios, trading commissions and bid-ask spreads, there are other potential costs associated with investing in ETFs that investors should be aware of. Some brokers may charge annual account maintenance fees if an investor’s account balance falls below a certain threshold. Additionally, some brokers may charge inactivity fees if an investor fails to meet a minimum trading frequency or maintain a certain balance. Typically, these fees are not more than a couple hundred dollars per year.

ETF Fees vs. Mutual Fund Fees

When comparing ETFs versus mutual funds, you will find that they share many of the same fees. However, mutual funds may carry some additional fees.

Expense ratios: ETFs tend to have lower expense ratios when compared to mutual funds. This is because ETFs are passively managed and typically track an index, whereas many mutual funds are actively managed, leading to higher management fees.
Trading costs: ETFs are traded on exchanges like stocks, so you will incur brokerage fees whenever you buy or sell them. Mutual funds, on the other hand, often have no trading costs if you buy directly from the fund company or through a platform that offers no-transaction-fee (NTF) funds. However, some mutual funds may have sales loads or redemption fees.
Minimum investment: Mutual funds may have higher minimum investment requirements compared to ETFs. This can impact affordability, especially for investors with limited capital.
Tax efficiency: ETFs are generally more tax-efficient than mutual funds due to their unique structure and how they create and redeem shares. This can result in lower capital gains distributions for ETF investors.
Expense fees: Mutual funds might charge various fees, such as front-end loads, back-end loads and 12b-1 fees, which can increase the overall cost of investing in them. ETFs typically do not have these types of fees.

Overall, ETFs are often seen as more affordable due to their lower expense ratios and potential tax advantages. However, the total cost depends on your specific investment strategy and brokerage fees, as well as the funds’ structures and fees.

Choosing Between ETFs and Mutual Funds

An advisor comparing ETF vs. mutual fund fees for clients.

When choosing between ETFs and mutual funds, there is much more to consider than just the fees.

Investment objective: Determine your investment goals, risk tolerance and time horizon because ETFs and mutual funds may suit different objectives. For example, ETFs may be better for short-term trading or passive investing strategies, while mutual funds could be preferable for long-term goals or active management.
Liquidity: ETFs trade on exchanges throughout the trading day like stocks, providing intraday liquidity. Mutual funds, however, are priced once per day after the market closes and are redeemed directly through the fund company, which can affect liquidity based on the fund type and size.
Minimum investment requirements: Check the minimum investment requirements for ETFs and mutual funds. Mutual funds may have higher minimums when compared with ETFs, which can impact accessibility for investors with limited capital.
Historical performance and track record: Review the historical performance and track record of the ETF or mutual fund, including risk-adjusted returns, consistency and manager expertise (for actively managed funds). Past performance does not guarantee future results, but it can provide insights into fund management and strategy.

Understanding Tracking Error

When you invest in an ETF, you might expect it to perfectly match the performance of its underlying index — but that is not always the case. The difference between an ETF’s return and the return of the index it tracks is called tracking error.

Tracking error occurs for a few reasons.

Management fees: ETFs deduct expenses (like the expense ratio) from returns.
Liquidity constraints: Buying and selling certain securities in the index can be costly or impossible in real time, especially in less liquid markets.
Sampling: Some ETFs do not hold every single stock in the index (particularly when the index has thousands of components) but instead hold a representative sample to keep costs down.

To assess how efficiently an ETF tracks its benchmark, review its historical performance compared to the index it follows. Fund fact sheets, prospectuses and ETF research tools typically report this information. A lower tracking error indicates the ETF does a better job replicating the index’s returns.

How ETF Fees Affect Long-Term Returns

Even though ETFs are known for low costs, even a small difference in fees can significantly impact your portfolio over time. Paying an extra fraction of a percent each year may seem minor, but over decades, it can amount to thousands of dollars.

For example, let’s compare two ETFs, one with a 0.1% expense ratio and one with a 0.5% expense ratio. Assuming a $50,000 investment that grows at 7% annually before fees over 20 years:

ETF Fee	Ending Value After 20 Years
0.1%	$190,096
0.5%	$174,494

This amounts to a difference of over $15,600, just from the higher fee, which is money that could have stayed in your account.

When comparing ETFs, look for low expense ratios, especially if you plan to hold the investment long term. Choosing a fund with a modest fee can help you retain more of your returns so you can build wealth faster.

Bottom Line

An advisor discussing ETF fees with a client.

Understanding average ETF fees can help you optimize your investment returns. While ETFs generally offer lower expense ratios compared to mutual funds, you should also consider other fees, such as brokerage commissions, bid-ask spreads and potential tracking errors. Finally, do not forget to evaluate your investment goals, trading frequency and cost considerations when picking ETFs that align with your financial objectives.

You could consider working with a financial advisor to create an investment strategy using ETFs to grow your wealth over time.

Tips for Investing

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