Weighing ETF cost factors
Which ETF cost factor matters more often depends on the answers to two questions: “What’s my holding period?” and “How large is my trade?”
Low expense ratios are a proven driver of long-term performance, and they become more important as the ETF holding period lengthens. Conversely, bid/ask spreads and premium/discount volatility are generally more important for shorter holding periods. Tracking error tends to be equally important across all time horizons and trade sizes, while market impact costs typically come into play only for larger trades.
It’s unlikely that any one ETF will be the lowest-cost across all five cost factors when compared with similar products. Ultimately, the relative importance of each cost factor depends on the investor’s goals and the nuances of the trade.
For help navigating these costs, download our guide, Understanding the Total Cost of ETF Ownership.
