Trading costs and fees
Trading costs and fees
Finally, we come to a crucial part that most everyone is concerned about - the trading costs and fees of ETFs.
They can be divided into three categories: commissions and transaction fees, operational expenses related to ETF management (including management fees, custody fees, etc.), and bid-ask spread.
Non-US residents also need to pay dividend taxes.
Commissions and Transaction Fees
Just like trading stocks, buying or selling ETFs incurs commissions and transaction fees for each order executed. As a result, this cost has a more significant impact on high-frequency traders. Specific charges are determined by each individual broker.
Expense Ratio
OER refers to the percentage of the annual operational expenses related to ETF management relative to the fund's assets. For example, let's say you hold an ETF worth $10,000, and the ETF's expense ratio is 0.1%, then you need to pay $10 annually. This fee isn't deducted in a lump sum at the end of the year, but instead, it's subtracted from the fund's net assets every day you hold the ETF. Suppose your investment in the ETF earns zero returns after one year. In that case, you will see your holding value gradually decrease from $10,000 to $9,990 over that period. If you invest for more than one year, this fee will compound over time like a snowball. Therefore, the longer the investment horizon, the more attention you need to pay to the expense ratio because slight differences can lead to vastly different final returns.
Bid-Ask Spread
This may be a trading cost that many investors overlook, but for frequent traders, this factor may be more critical than expense ratios. The bid-ask spread amount varies for each ETF, but ETFs with lower trading volumes typically have larger bid-ask spreads.
For example, let's assume two ETFs that track the same underlying asset and have a current price of $10.
ETF A has a management fee of 1%, but a bid-ask spread of $0.02, while ETF B has a management fee of 0.5% and a bid-ask spread of $1. Suppose both are bought for 100 shares and held for one month, with both ETFs having a similar performance of 10% in returns while the bid-ask spread remains constant.
If sold at that point, disregarding other factors, which ETF would have a higher final return?
The answer is ETF A because when factoring in the bid-ask spread (ETF A's spread being 0.2% and ETF B's spread being 1%), ETF A's return would be $1,086.8 while ETF B's return would be $1,083.5.
Dividend withholding tax for non-US residents
Lastly, if you are a non-US resident, a dividend withholding tax of 30% will automatically be deducted from your ETF's dividends each time they are paid (no payment is required as the tax will be deducted before the dividends are credited to your account). This tax is levied by the US government.
When we trade ETFs, the fee structure is as follows:
Now that you've learned almost everything you need to know about trading ETFs, all that's left is to understand the trading process. It's a straightforward process, and as long as you have a securities account, it's very similar to trading stocks. Finding the ETF you want to trade is crucial, but we'll cover that topic in another article.
This presentation is for informational and educational use only and is not a recommendation or endorsement of any particular investment or investment strategy. Investment information provided in this content is general in nature, strictly for illustrative purposes, and may not be appropriate for all investors. Read more
