Exchange-traded funds have become the investment wrapper of choice for a growing number of investors ranging from institutions to individuals. Transparency, tradability, tax efficiency, and low costs are the trademarks of the ETF package (although I'd argue that some of these features are oversold, while others go underappreciated). Fees in particular are a critical input in investors’ ETF-selection process. But when it comes to choosing an ETF--particularly when picking among funds tracking identical or substantially similar benchmarks--it’s important to look beyond the headline fee and take a more holistic approach to assessing the total cost of ETF ownership. Here I will outline the components of the total cost of owning an ETF, address how to size them, and discuss how their relative importance varies depending on an investor’s circumstances.
The total cost of ETF ownership can be roughly split into two parts: holding costs and transaction costs.
Ben Johnson, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.