Costs are the one part of investing you control completely. This module covers every cost of owning an ETF and shows, with real arithmetic, why small percentages become large amounts.
Every fund charges a yearly fee, shown as a percentage of your investment. In the US it is called the expense ratio. In Canada you will see the management expense ratio (MER). You never get a bill. The fund takes it a little each day out of its assets, so it shows up as a slightly lower return.
Example. $10,000 in a fund with a 0.10% expense ratio costs about $10 a year. The same $10,000 in a fund charging 2.00% costs about $200 a year.
Broad index ETFs commonly charge well under 0.25%. Always confirm the current figure on the provider’s page, because fees change.
A fee is charged on your whole balance every year, including on past growth. So it compounds, just like returns do, but against you.
Example. You invest $10,000 once and the investments earn 6% a year before fees for 30 years.
| Yearly fee | Return after fee | Value after 30 years | Lost to fees |
|---|---|---|---|
| 0% | 6.0% | $57,435 | — |
| 0.2% | 5.8% | about $54,270 | about $3,165 |
| 2.0% | 4.0% | about $32,434 | about $25,000 |
The 2% fund leaves you with roughly 44% less than a no-fee result. Nothing about the investments changed. Only the fee did. These figures are an illustration using a constant return, not a forecast.
An ETF has two prices at any moment. The bid is the most a buyer will pay. The ask is the least a seller will accept. You buy at the ask and sell at the bid. The gap is the spread, and it is a cost you pay each time you trade.
Example. An ETF is quoted bid $50.00, ask $50.02. Buying and later selling 100 shares at an unchanged quote costs 100 × $0.02 = $2.
Large, heavily traded ETFs often have a spread of a cent or two. Small or niche ETFs can have much wider spreads. If you buy and hold for years, the spread is a minor one-time cost. If you trade often, it adds up.
Premium and discount. If an ETF’s market price is above its NAV, it trades at a premium. Below, a discount.
Example. NAV is $25.00 and the price is $25.10. The premium is $0.10 ÷ $25.00 = 0.4%. For large ETFs this is normally tiny. It can widen in stressed markets, or for funds holding assets that trade in a different time zone.
Tracking difference. This is the ETF’s return minus its index’s return over a period. It is the truest measure of total cost, because it captures the fee plus everything else.
Example. The index returns 8.00% and the ETF returns 7.88%. The tracking difference is −0.12 percentage points. If the stated fee is 0.10%, the fund lost only a little more than its fee, which is a good result.
Educational purposes only; not financial advice. Any funds, tickers and figures are illustrative examples, not recommendations. Fees, tax rules and contribution limits change, so confirm current details with the fund provider and your tax authority. Worked examples use constant returns and are not forecasts. Written by Elizabeta Dimoska. Always do your own research and consult a licensed advisor.