Rabu, 21 Desember 2011

How Much Does It Cost to Own an ETF?

If you're an investor looking to possibly put your money into an Exchange Traded Fund (ETF), how much can you expect that will that cost you?

Shopping at the ETF Cafe - Source: Digerati Life

ETFs are a lot like mutual funds, in that they are made up of a number of individual stock or bond holdings and have operating expenses that will be charged against your account, but they're not exactly. Unlike mutual funds, which are only allowed to change hands at the end of a business day, you can actively trade an ETF - placing market orders to buy and sell at any time when the market is open, just like the shares of stock or bonds you might own.

Combined, those characteristics make an ETF something of a hybrid between mutual funds and regular stocks. Which means that figuring out how much it costs you to own an ETF is a little more involved than looking at the fund's Operating Expense Ratio.

If you're shopping for an ETF, and you're looking to minimize your costs as a way to help maximize your return on your investment, you'll also need to consider the funds Bid-Ask Spread, the value of any trading commission you might have to pay, as well as how long you plan to keep your money in the ETF and also how much money you'll keep in the ETF.

Fortunately, our newest tool is here to do the job for you! Based on math presented by Michael Iachini in the Winter 2011 edition of Charles Schwab's On Investing magazine (the link will work once the print edition is published online), our latest tool can help you find out how much it owning an ETF will really cost you!

Just enter the relevant data below, and we'll do the rest!

ETF and Investment Information
Input Data Values
ETF Operating Expense Ratio [%]
ETF Bid-Ask Spread [%]
Commission per Trade [$]
Time You Plan to Hold the ETF [years]
Amount You Plan to Invest in the ETF [$]

Annual Cost of Owning an ETF
Calculated Results Values
Your Annual Cost of Ownership [%]
Your Annual Cost of Ownership [$]

Using the default values in the tool, we find that the approximate annual ownership cost for investing $10,000 for half a year in an ETF with an Operating Expense Ratio of 0.10%, a Bid-Ask Spread of 0.15% and a per-trade commission of $8.95 is 0.76%, or $75.80.

Different ETFs and different brokers however will have very different numbers. Using our tool will help give you a good way to compare the relative costs of owning those ETFs when it matters most: before you choose to invest in them!

Image Credit: The Digerati Life

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