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