ETF Expense Ratios

Although all Exchange Traded Funds (ETF) are index funds, they still incur administrative / management / operating costs. All of these costs make up what we call the “expense ratio” of the Exchange Traded Fund (ETF). Unfortunately, “expense ratios” affect your rate of return. Let’s just say your ETF has an expense ratio of 0.50%. Therefore, if your ETF has a one year return of 10%, you don’t actually get to keep that 10 percent. After the ETF Company subtracts the 0.50% expense ratio, your return will be 9.50%.

Don’t be discouraged by this; ETFs have the lowest expense ratio of any type of fund. The average expense ratio of a U.S. Equity ETF is a mere 0.39%. The average for a Traditional Actively Managed U.S. Equity Fund is 1.48%. That is a huge difference, especially considering that index funds have outperformed 85% of all managed mutual funds over many years.

Just for your information, International ETFs have an average expense ratio of 0.68% (Traditional Actively Managed International Funds: 1.75%). Fixed Income ETFs have an average expense ratio of 0.17% (Traditional Actively Managed Taxable Fixed Income Fund: 1.13%). The cheapest ETF available is the iShares S&P 500 Index (IVV), which has an expense ratio of only 0.09%. On the other end of the spectrum; the most expensive ETF to my knowledge is the iShares Taiwan Index (EWT) with an expense ratio of about 1.03%. The Vanguard family of ETFs has the lowest average expense ratios at only 0.22%.

Conclusion:

ETFs are a significantly lower cost investment than Traditional Actively Managed Funds, not taking into account taxes and brokerage commissions.