ETFs are the instrument of choice for millions of investors in the U.S. Through a single trade and for a relatively low price, an investor gains broad exposure to a market, sector or niche. They don’t have to go out and purchase dozens of individual securities for diversification. But knowing what you’re investing in isn’t the same as understanding how much it’ll cost. When going grocery shopping, it’s simple enough to look up the item’s value online to see if you’re getting a good deal. However, ETF prices have nuances that can’t be easily observed “on the shelf.”
The ETF Recipe
As implied by the name, all ETFs trade on exchanges with transactable market prices. Most disclose their holdings on a daily basis. Mutual funds, in contrast, are not listed on any exchange, and they can go months without disclosing their holdings. ETFs do have a daily net asset value (NAV) that is set at the end of the each trading day, just as a mutual fund has. But they also have intraday prices as they trade throughout the day. Mutual fund share transactions only finalize after the market close.
Within the range of products trading in an ETF wrapper, there is significant variety. Select two funds at random, and there can be myriad differences between them, even if they cover the same subsector. For example, a long-term investor buying an ETF with an expense ratio of 0.03% could actually fare worse than if they had bought an otherwise identical ETF with a fee three times as high due to something as simple as how liquid the funds are.
There are many small factors that can affect the cost of an ETF. Most of the time, if you know what to look for, you can find the most important elements of an ETF’s price on its publicly available product page. However, sometimes you need to dig into the prospectus, a formal, legally mandated document that provides detailed information about the fund.
Below, we cover three of the most important elements. You can use them to determine whether you’re getting the best deal possible for an ETF.