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I see that ETFs do work very similar to diversification of individual stocks following either an industry or an index. I am thinking of changing my strategy to reduce my cost of investing which at this point is quite high, around 1.5%.

I will like to know if I go for the ETFs will the ETF fund charge me a management fee even if I paid a broker a transaction fee to buy securities for that ETF?

Here is what my trading site has to say about it:

Folio Investing has a solution — with the Folio Unlimited Plan and our trading windows, you'll never pay another commission to invest in your favorite ETFs.

Of course Folio Unlimited Plan is not what I am going to pay, but if I choose their not-unlimited plan, then I will only pay $4 per trade.

Any observations are welcomed.

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3 Answers

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ETF's have expenses (including management fees), but much lower than mutual funds. Yes, they charge money for management, check the fund prospectus for details.

Here's a list of ETF's that can be sorted by the expense ratio.

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I will be paying then my $4 trading fee for each ETF that I put money in/out and on top of that they will be charge a % for expenses? ok. So before doing this change, I have to take this in account. Thanks. – Geo Jan 30 '12 at 14:22
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@Geo trading fee is to the broker that provides the trading platform, not the fund. – littleadv Jan 30 '12 at 19:44
If the broker doesn't charge a trading fee for the ETF, they probably expect to make it up elsewhere (e.g. if they operate the ETF themselves, or if they expect they will collect trading fees for individual stocks). – fennec Feb 1 '12 at 18:57
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All ETFs have management fees, but this fee is built into the share price. You will not receive a statement that says "0.10% management fee". Brokers can also charge recurring fees for using their service.

Note that buying sector funds is not necessarily the same as diversifying with a particular stock. When you buy a sector index, you're buying everything in the sector -- good and bad. If ETFs are your primary investment vehicle, I'd look at using broader indexes to diversify. (ie. Total Stock Market, Large-Cap Index, Small-Cap Index, etc) There are many questions on this site exploring this issue.

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I hear you duffbeer703, but my fear is that my investment is not big enough to really diversify without incurring in large costs like 1.5%. So I thought of changing strategies, since my portfolio is not providing very high returns either-way. do you have any links that you will recommend to create a good strategy for a small portfolio? – Geo Jan 30 '12 at 15:52
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Put 85% in a broad market index like VTI, 15% in a broad bond index like BND. Total expense ratio is like 0.08%. If you use TD Ameritrade, there are no brokerage commissions. – duffbeer703 Jan 30 '12 at 20:15
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Built in to the share price, meaning specifically that the amount of underlying assets you get per ETF unit decreases very slightly every day. – poolie Jan 30 '12 at 23:02
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If you're genuinely concerned about paying fees and lowering your expenses while investing primarily in ETFs, perhaps consider switching to a broker that offers their own range of ETFs?

For example, Charles Schwab has a considerable number of ETFs with low expense ratios, and if you're a Schwab account holder, they don't charge commissions for the trades themselves - which is helpful if you want to diversify by putting your money in several different sector ETFs.

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Vanguard lets you trade Vanguard ETFs commission-free as well. – fennec Feb 1 '12 at 17:12

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