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Actual ETF Fees - How to AVOID Getting Robbed by ETF Fees - YouTube
Channel: Learn to Invest - Investors Grow
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hi I'm Jimmy in this video we're gonna
look at the fees of exchange-traded
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funds or ETFs for short now in this
video we're gonna try to go beyond the
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typical ETF fees that many investors
look at and we're going to look at some
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ETF fees that are often more overlooked
and or more implied ETF fees then
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towards the end of the video I'm going
to touch on some examples where it could
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make sense to pay higher fees and
perhaps the more insight we have the
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more money we can make more money we
make their closer we can get to our
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personal goal whatever that is ideally
financial independence okay now let's
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start with a common fee but in today's
world can often be avoided completely
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and that is commissions
a commission is a fee that our broker
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would charge us for executing the trade
and for doing the paperwork behind
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getting us the shares that we bought or
the ETF that we bought but thankfully a
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lot of that is automated these days and
many brokers are no longer charging
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commissions and I think as time goes on
less and less they're going to be
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charging commissions so if our broker is
charging us a commission well it could
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be time to talk to them about either
long that Commission dropping it
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completely or more likely finding a new
broker that doesn't charge a commission
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so the Commission fee is mostly
avoidable these days okay next let's
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look at one of the more well-known ETF
fees and that is the expense ratio so
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the expense ratio is how much the
exchange-traded fund manager charges us
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on an annual basis to cover their
operating expenses now this is a short
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list of some of the largest ETFs out
there and we can roughly see how much
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assets they have in each of the funds
and the part we care about how much
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their expense ratio is this is the most
popular ETF fee out there and when often
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times you might hear people say an
investor say oh they're fee is blank
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this is what usually what they're
talking about
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now we can see that these fees run from
as low as 3 basis points to as high as
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GLD down here which is 40 basis points
outside of this there are some ETFs out
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there that don't have any fees and there
are others are much higher than these
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but we'll just stick with these is an
example for now ok so obviously we want
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this fee to be as low as possible now
let's look quickly at how an ETF how etf
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fees actually
to help us get a better understanding of
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where some other call it implicit fees
could be hiding so we're the investor
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and we're gonna go out and buy an ETF
now this is where we would be charged as
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commission if we're at a brokerage firm
that has one but let's imagine we're not
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being charged one so we'll get rid of
that
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okay now this ETF is going to be
investing in something maybe it's a
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bunch of stocks or bonds or commodities
or whatever it is that's what those
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circles represent we're investing we're
likely investing in the ETF because one
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of the advantages of buying ETFs is that
we tend to you're it's like you're
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buying a whole portfolio all at once
so let's imagine that this particular
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ETF has 100 million dollars
well this ETF is managed by a fund
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manager maybe the ads Vanguard or
iShares or some other company but either
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way it's going to be managed by a fund
manager so when it comes time for that
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fund manager to get paid well their fee
comes right out of the pool of assets
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that the fund controls so if it's a
hundred basis points e which is the same
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as 1% well that fund manager since this
fund has 100 million dollars in it they
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will get a million dollars we as the
investors never see that happen since it
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all happens within it all happens behind
the scenes of the ETF so obviously we
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want this ETF fee to be as low as
possible they call this fee the expense
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ratio so we want to keep that in the
back of our mind expense ratio we
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ideally no commissions low expense ratio
okay simple enough now let's look for
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some other let's call them more subtle
Fiza more they're more implied fees
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behind an ETF so this fund manager is
managing this portfolio of stocks now
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let's say as time goes by well maybe
they no longer want one of the stocks
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maybe doesn't meet the rules of the fund
or whatever it is so they sell that
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stock what do they do
generally they replace that stock with
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perhaps a different stock or bond or
whatever it is now the odds are even if
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we're not paying a commission up here
well the odds are that the ETF fund
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manager is paying commissions to their
firm so down here every time they buy
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and sell a stock or a bond or whatever
it is in the ETF well that's there's
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likely to be commissions charged in
those transactions
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and that is not accounted for in the
expense ratio for that we're gonna want
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to look at something known as the
portfolio turnover we want our portfolio
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turnover to be as low as possible
because the more the fund moves in and
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out of different positions the higher
the turnover ratio will be and
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ultimately that will lead to more
transaction costs like commissions it
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could lead to higher taxes if the fund
has to pay capital gains tax there could
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be other fees tied to them moving in and
out of positions so they're going to
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define all of this in the company's
perspective but broadly speaking we want
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a lower turnover ratio because that is
likely to lead to less overall fees or
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overall implied fees that are not
included in the expense ratio okay
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okay simple enough now this brings us to
another sort of implied fee it's not
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really a fee but it's something that
could end up costing us more and that is
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known as the bid-ask spread so when we
go on we buy a stock or an ETF or
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whatever whatever the case is if this
would hold true for both of them you
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might get a quote like this this is a
quote for SP y and as we could see the
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bid for SP y is 320 205 and the ask is
320 206
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o six just a penny apart that's pretty
good but the higher this spread is the
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more the broker makes because what we
have to remember is that if we were to
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place a market order and we say okay we
want to buy a stock or an ETF at the
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market price well we buy it at the ask
price if we wanted to sell or we sell at
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the bid price so you're always going to
get if you buy a market order you're
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always going to get the worst price
available so we want this spread to be
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as low as possible and generally with
the more higher liquid more popular ETFs
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this spread is going to be very very
small but if we look at something like
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AR kg what we can see their spread is
three-sentence then if we switch to LA
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bu well there they have a spread of five
cents now I know this may not sound like
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a lot but we are talking this is five
cents per share so depending on how many
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shares were buying this could make a
meaningful difference and why pay a
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nickel more if we don't have to
now one way to get around this is
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instead of buying you placing an order
at a market order you could do it at a
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limit order and try to close that gap a
bit now if you've been unfamiliar with
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this type of thing with the trading side
of investing please let me know in the
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comments below
perhaps I can do a video on some of the
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pitfalls of that some investors run into
when they're trying to place trades or
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perhaps how to better maximize profits
when trading in and out of a position
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either way from the ETF standpoint if
we're investors for let's say the long
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run perhaps the Nikolas share doesn't
matter all that much but I still think
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it's worth remembering or at least being
aware of and then we could decide as we
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get into that position so now to answer
the question does it ever make sense to
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pay a higher fee for an ETF and I think
the answer is absolutely it can be smart
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sometimes so let's start with this ETF
this is an ETF called Invesco solar ETF
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ticker symbol ta n obviously they focus
on the solar industry but their fee is
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about 70 or 71 basis points so seven
tenths of one percent now by today's
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standards many people would look at this
fee and say it's very high but this is a
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very specialized ETF and if we're
interested in an ETF like this if we're
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interested in investing in the solar
industry well it could serve a very
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specific purpose in our portfolio well
if that's the case I might be willing to
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pay a higher fee this ETF as an example
in 2019 has a total return of more than
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65 percent that's more than double what
the sp500 did well we could have paid 3
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basis points for a sp500 ETF or maybe we
pay 70 basis points for this ETF well
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hindsight being 20/20 clearly this one
would have made more sense last year now
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I bring this out simply to illustrate
that if we let our research lead us to a
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great potential opportunity for a sector
or a group of stocks or bonds or
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whatever it might be
well I wouldn't avoid investing in a
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particular ETF just because the expense
ratio looks high relative to broad very
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popular ETFs like s py or any one of the
Vanguard ETFs perhaps our research is
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correct and we're willing to pay a
higher fee and ultimately that gives us
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the broad access to a group of stocks or
bonds or whatever that could ultimately
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lead to our portfolio outperforming now
recently I've been spending a lot of
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time researching dividend stocks and
dividend ETF and I've also recently done
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a review of some dividend ETF where I
went a bit deeper in looking at things
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like implied liquidity and things like
that around ETFs so that could be a good
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next video for you to watch if you're
interested there's a link here and
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there's a link in the description below
and thank you so much for stick with me
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all the way into the video I really do
appreciate it thanks and I'll see in the
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next video
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