Comparing ETF Fees and Mutual Fund Fees (2024)

FAQs

Comparing ETF Fees and Mutual Fund Fees? ›

ETFs have transparent and hidden fees as well—there are simply fewer of them, and they cost less. Mutual funds charge their shareholders for everything that goes on inside the fund, such as transaction fees, distribution charges, and transfer-agent costs.

ETFs have lower costs on average than passively managed mutual funds and don't charge 12b-1 fees. The expense ratio is the cost of the mutual fund, including any management fees, fees for expenses, and 12b-1 fees, and expressed as a percentage of the total assets under management.

ETFs are generally considered more tax-efficient than mutual funds, owing to the fact that they typically have fewer capital gains distributions. However, they still have tax implications you must consider, both when creating your portfolio as well as when timing the sale of an ETF you hold.

Trading commissions

Also known as ETF transaction fees or ETF transaction costs, these may range from $8 to $30 at brokerage firms. Trading commissions are charged per trade, so they can add up if investors buy and sell a lot—and they're usually more expensive when an order is placed in person or over the phone.

ETF expense ratios could be as low as 0.35%. An active mutual fund could have a total expense ratio of up to 2%. Expense ratios eat into the returns of funds, so the lower the expense ratio, the better.

ETFs usually have to disclose their holdings, so investors are rarely left in the dark about what they hold. This transparency can help you react to changes in holdings. Mutual funds typically disclose their holdings less frequently, making it more difficult for investors to gauge precisely what is in their portfolios.

ETFs don't often have large fees that are associated with some mutual funds. But because ETFs are traded like stocks, you may pay a commission to buy and sell them, although there are commission-free ETFs in the market. To be fair, mutual funds do offer a low cost alternative: the no-load fund.

Thanks to the tax treatment of in-kind redemptions, ETFs typically record no gains at all. That means the tax hit from winning stock bets is postponed until the investor sells the ETF, a perk holders of mutual funds, hedge funds and individual brokerage accounts don't typically enjoy.

One common strategy is to close out positions that have losses before their one-year anniversary. You then keep positions that have gains for more than one year. This way, your gains receive long-term capital gains treatment, lowering your tax liability.

What is a reasonable management fee for ETF? ›

A good rule of thumb is to not invest in any fund with an expense ratio higher than 1% since many ETFs have expense ratios that are much lower. Also, ETFs tend to be passively managed, which keeps the management fee low.

$0.00 commission applies to online U.S. equity trades, exchange-traded funds (ETFs) and options (+ $ 0.65 per contract fee) in a Fidelity retail account only for Fidelity Brokerage Services LLC retail clients. Sell orders are subject to an activity assessment fee (from $0.01 to $0.03 per $1,000 of principal).

You won't pay a commission to buy or sell Vanguard mutual funds and ETFs online in your Vanguard account. A few Vanguard mutual funds charge fees designed to help cover high transaction costs and discourage short-term trading.

For most investors, ETF trades take place with other investors, and not with the fund company itself. That means the fund company doesn't have to process your order; doesn't have to mail you the same documents; and doesn't have to go into the market to process your order. Less work = lower costs.

“Asset managers often set ETF fees at similar levels as the cheapest share classes of mutual fund strategies, sometimes cheaper,” the report said. “This is partly why the average active ETF fee (0.65%) is 36% cheaper than the average active mutual fund. ETFs also don't have sales loads or 12b-1 fees.”

The drivers of an ETF's total cost

Many investors are familiar with the two factors that make up the bulk of an ETF's total cost—the expense ratio and bid/ask spread. The expense ratio is an explicit, ongoing cost that reflects an ETF's annualized operating expenses and is factored into its net asset value (NAV).

ETFs are generally lower than those that are charged by actively managed mutual funds because their managers are merely mimicking the contents of an index rather than making regular buy and sell decisions, For some investors, the design of a passive ETF is a negative.

The most obvious is the operating expense ratio (OER), which is incurred while owning the ETF. However, trading costs are also important: Commissions (if applicable), bid/ask spreads, and changes in discounts and premiums to an ETF's net asset value (NAV) will impact the total cost of ownership.

ETFs have several advantages for investors considering this vehicle. The 4 most prominent advantages are trading flexibility, portfolio diversification and risk management, lower costs versus like mutual funds, and potential tax benefits.