Hidden Costs of ETFs

Exchange-traded funds (ETFs) are charging dirt cheap fees in many cases. But many ETF owners don’t buy and hold them. ETFs are used for trading by a lot of investors. This article points out that the trading leads to a lot of costs, both hidden and visible. Inefficiencies in the system result in mispriced ETFs, and that is a cost many investors never are aware of.

“I was surprised both by how large and how common these differences are,” says Mr. Petajisto. Even if you trade only a few times a year, “your ETF portfolio could easily be costing you 1% or 2% and you might not even know it.” He estimates that the hidden costs of trading ETFs exceed $18 billion annually — a trifle in the trillions of dollars of combined trading in these funds, but real money to those who leave it on the table.

These costs lurk in the normally tiny space between the market price of an ETF and the per-share value of the stocks, bonds and other assets it holds. The market price is the number most commonly quoted, including by most brokers; the value of the underlying assets is much less widely available. So the gap between the two numbers is hard for most investors to see.