How are ETF fees deducted from your investment?

How ETF Fees Work

When researching or looking into information about ETF (Exchange-Traded Funds) or mutual funds, you should look for the expense ratio. It is a percentage, representing the management fees that are deducted from the fund’s assets.

Fees are deducted from the ETF (and mutual funds) to pay for the fund’s management expenses and operating costs. This means they are also deducted from your profits. The lower the fees, the greater your share of the fund’s profits that you can keep.

Example of How ETF Fees Are Deducted

If an ETF or mutual fund has an expense ratio of 0.50%, this means that the fund’s expenses are equivalent to 0.50% of the fund’s managed assets. The company responsible for managing the fund will deduct half of one percent from the fund’s assets annually.

You will receive the ETF’s total distributions after expenses have been deducted. If the fund’s total distributions (before expenses) during the year are 10.00%, and the expense ratio is 0.50%, then your net return (after expenses) will be 9.50%.

Importance of ETF Fees

Most ETFs are passively managed, so their expense ratios are generally lower than those of most mutual funds. Since ETFs only track a benchmark index, there is no need for a fund manager to make stock selections, analysis, or trades.

ETF Fees and Finding the Best Funds

Funds that charge the lowest fees are not always the best ones to buy. Before purchasing an ETF, compare it with other similar funds.

For example, make sure the ETFs you are comparing track the same index. It is also helpful to consider past performance and total assets.

The total asset size of the fund matters for our analysis. Generally, larger assets mean greater liquidity. This can affect the fund’s performance, especially in the short term. ETFs with larger assets are often considered safer investments than those with smaller assets.

One growing interest from some of the largest major investment firms is the emergence of funds with no fees or 0% fees. For example, Fidelity Investments offers the following funds with no fees:

• Fidelity ZERO Large Cap Index Fund (FNILX)
• Fidelity ZERO Extended Market Index Fund (FZIPX)
• Fidelity ZERO Total Market Index Fund (FZROX)
• Fidelity® ZERO International Index Fund (FZILX)

If you are planning to invest in several funds, review their holdings to ensure there is no overlap or similar investments. This will help you diversify your investments and avoid over-reliance on a specific stock.

Smart investors conduct research and comparisons on expense ratios before finding the best ETFs. When comparing ETFs that track the same index, the fund with the lower expense ratio is usually the better choice.

Frequently Asked Questions (FAQs)

What is an ETF?

An Exchange-Traded Fund (ETF) is a fund that can be traded on the stock market like stocks. ETFs typically track an index, sector, commodity, or other assets. You own a piece of an ETF, but you do not own the underlying assets. ETFs are traded throughout the day.

How do I invest in an ETF?

To invest in an ETF, you will need to open a brokerage account. There are many brokerage accounts to choose from, so consider the features and fees of each broker. Many brokers include educational features that can help you make the most of your brokerage account. Next, conduct research on ETFs. Index funds are usually a good starting point, but research your options and choose what fits you.

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Source: https://www.thebalancemoney.com/etf-fees-deducted-from-your-investment-4156849