How do I determine the expense ratio of an ETF?
I want a clear definition of the expense ratio, relative to ETFs. For example, if I invest $10,000 in an ETF, how much will the initial fee be? How much will any annual fees be? Will there be another fee when I sell the ETF?
There are/ can be several fees associated with an ETF purchase. The transaction costs can vary on where you purchase the ETF through, such as direct, discount broker or broker. ETFs look like a mutual fund, but most trade like stocks. Understand the difference and most costs will become clearer. You can roughly break costs into 2 major categories, ETF company management costs and broker transaction costs.
An expense ratio reflects the cost of managing and operating the Exchange Traded Fund (ETF) by the company that offers/ manages the product (Vanguard, I Shares etc.). It is usually one of the costs associated with an ETF. The expense ratio is the behind the scenes cost usually expressed in bps (basis points) or percentage form. 100 bps equals 1%. The cost is an annualized cost and is usually deducted by the managing company before you earn your return. As an example, a S&P 500 ETF with an expense ration of 7 bps is $7 per $1,000. The expense ratio is outlined in the funds prospectus with examples and on the offering companies web site.
Most other fees deal with the place you buy the ETF through (broker/ dealer) are transaction costs. Costs/ fees you may be liable for include: a trading commission or a cost to buy or sell the ETF. This cost can vary depending on the custodian/ broker dealer channel you buy it through. If you use one of the discount brokers, like Schwab, Vanguard or Fidelity, there are a number of products including many ETF's you can buy or sell without a commission. The trading costs can vary from broker to broker so select your broker dealer carefully after reviewing all their costs. There may be an additional fee when selling the ETF. These may vary depending on the channel you use for the transaction.
There can also be miscellaneous costs such as: "an SEC or handling costs" that will also vary with the broker dealer you select.
Your question is a good one, but I suggest doing additional reading/research to learn all the different costs and risks associated with Exchange Traded Funds (ETFs) as well as how they are made up (the ETF). Expense ratio costs are only part of the picture. Other important considerations include: liquidity, leverage, other transaction fees and tax costs to name a few. Space prohibits fully answering your question. A good place to start in figuring and understanding the true cost, is divide the costs between the issuing company and the broker dealer transactional fees.
I can see you are a fee conscious investor, good for you! The first question to you is who’s managing for you. If you use an advisor to set up a fee-based account, you will be paying an advisor fee, the annual underlying cost for the ETF you own, and possibly account maintenance fee.
If it’s in a commission-based account managed by either your or your advisor, you will be paying the transaction cost each time you or your advisor makes a trade in addition to the annual ETF fee. There may be another fee when you exit out, which is a commission trade.
The second question is it’s in a tax-advantage or taxable account. Without a tax umbrella to protect the profit, any profits/loss will be reported on your annual tax return, which could be an additional cost. Best!