Set out what an ETF costs to hold
The idea
The cost of holding an ETF has two parts. The management fee, or expense ratio, is charged continuously out of fund assets, so its drag grows with the holding period. Trading costs are paid on the way in and out: commissions, if any, and the bid–ask spread, plus any premium paid or discount received relative to NAV. Total holding cost as a percentage is the round-trip trading cost, twice the one-way commission plus the full bid–ask spread, plus the annual fee times the years held. Trading costs dominate for short holding periods and the fee dominates for long ones. The trap is charging the full spread on both the purchase and the sale, which counts it twice.
In the app: 2 practice questions on this outcome, a narrated walkthrough with diagrams, spaced review that brings it back before you forget it.
Take the free diagnostic →More in Exchange-Traded Funds: Mechanics and Applications
- Explain how ETF shares are created and redeemed and what role authorized participants play
- Set out how ETF shares change hands on the secondary market
- Set out where ETF tracking error comes from
- Set out what influences the bid–ask spread on an ETF
- Set out why an ETF can trade above or below its NAV
- Set out the risks ETFs carry
- Recognise and explain the ways ETFs can be used in a portfolio