Evaluating the True Costs of Trading ETFs

Scott Burns: Evaluating all the costs in trading and owning an ETF. Hi there. I'm Scott Burns, Director of ETF Research with Morningstar. Joining me today to talk about all the costs that come with owning an ETF is Rick Genoni, who is the head of Vanguard's ETF business -- Rick.

Rick Genoni: Thanks for having me.

Burns: Thanks again. I don't know if Vanguard needed to send somebody so high up the chain to talk about some basics, but I'm glad you're here to talk about that. When we look in the news right now, there are a couple of competitors for you and other distribution firms that are offering no-trade ETFs, which we think is a great development.

Trading costs -- that when you click on your in and out of the ETF trade -- that's just part of the trading costs that are out there. Maybe you could walk viewers through all of the things that factor into that ETF trade, so they understand all the costs that are embedded.

Genoni: I'll start by saying that certainly any move in the marketplace to lower all end fees for the end client is a very positive one. Certainly, Scott, there are other costs. Beyond just your up front fees on trading a product, you have to think about bid-ask spreads.

You have to think about actual execution quality. Were you able to execute your entire trade at the price that you set out to, or did you enter a market order and you pushed the price?

You have to think about fund management fees; such things as tracking error. How well did the fund do in terms of managing taxes? These are all, I think, critical factors when looking at the right product.

Burns: I think for investors out there, the bid-ask is one of the harder costs to get their hands around. It's very intangible. It does factor into the purchase. How do you recommend investors really manage that bid-ask process, and even just that trading execution? They're both pretty related.

Genoni: I think it's critical for clients to speak with somebody who understands the marketplace. If a retail client truly doesn't understand what the bid-ask prices are, they should be speaking to someone who has that background and can offer them the right level of education.

Certainly, Vanguard's brokerage group could help with that. These are all critical factors. Bid-ask spreads are something that industry-wide have been coming down. It's the more niche products that tend to trade with slightly wider bid-ask spreads and...

Burns: I also find the products with less than liquid underlying, too. That has a lot to do with it.

Genoni: Yeah. There are probably two drivers there. One is looking at the volume of the ETF overall, and then the second is looking at the volume of the underlying stocks or bonds in that basket and how tradable those are. That will drive the bid-ask spreads on the ETF.

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