How do ETF fees work?

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Like all managed funds, ETFs charge fees and incur costs. They do, however, tend to be a cost-effective managed investment option, as most ETFs are passive investments that do not charge the high active management fees charged by traditional managed funds.

Summary

  • ETF management fees typically are lower than fees charged by traditional active fund managers
  • Investors do not pay management fees directly to the ETF manager
  • Fees and costs are generally accrued daily and deducted on a periodic (usually monthly) basis from the ETF’s assets
  • Investors receive periodic statements setting out the fees and costs that have been deducted from their investment during that period

ETFs tend to be low cost

 

One of the factors driving the increasing popularity of ETFs in recent years is their generally lower cost structure in comparison to many traditional actively managed funds. Because most ETFs are passive investments, they tend not to charge the high active management fees charged by traditional managed funds.

 

In addition to the management fee charged on an ETF, other costs associated with an ETF include the costs of custodial services, auditing and unit registry fees.

 

Most of these costs are fixed and are expressed as an annual percentage. In some cases, an ETF may charge a ‘performance fee’, which is charged only if the performance of the ETF is better than a specified benchmark over a defined period.

How ETF fees are collected

ETF investors do not directly pay these fees and costs to the ETF manager or issuer. Instead, the fees and costs are reflected in the daily price of the ETF.

 

Management fees are not deducted on one specific date each year. Each day, a proportion of the total annual management fee is accrued and then deducted from the fund assets on periodic (e.g. monthly) basis.

ETF fee example

For example, the Betashares Australia 200 ETF (ASX: A200) charges an annual management fee of 0.04%.

If you invested $10,000 in A200, over the course of a year, assuming the underlying value of the fund’s holdings did not change and you re-invested your A200 distributions back into the fund, your investment would incur total management fees of $4.

Each day, approximately 1 cent would be accrued ($4/365 days), and then deducted on a monthly basis, so after 12 months your investment would be worth around $9,996 (assuming no change in the market value of the fund holdings).

The fees and costs applicable to your investment holdings will be disclosed in the periodic statements issued to you for the relevant ETF.

 

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Written by

Richard Montgomery

Manager – Investment Communication

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