Some of the profits made by the ETF will be used to pay for costs, rather than transferred to the share owners. Every ETF has costs, but some ETFs have higher costs than others. In the end, it’s all about how much the ETF can pay its shareholders in dividends. Owning shares in an ETF with high costs can definitely be worth it if the costs are linked to great profits for the ETF and, eventually, the shareholders. The end result is what matters.
Examples of costs
- Transaction costs that comes from modifying the portfolio.Let’s for instance assume that the ETF is tracking a stock index. When a stock is taken out or added, or simply has its weight in the index modified, the ETF must make purchases or sell stocks to replicate this.
- Transaction costs related to Creation and Redemptions
- Paying the fund managers
- Options selling/covering
- Selling an underlying because the call option holder decides to make an early exercise.
Many ETFs have an annual fee that must be paid by the shareholders to the ETF itself. Before you make any investment in an ETF, make sure you now how large this fee is and compare it to the fees charges by similar ETFs. You should also weight the fee against costs associated with other forms of investments.