How Are ETF Fees Deducted?

Over the last generation, exchange-traded funds (ETFs) have changed the financial world by offering a low-cost and easy way to build an instantly diversified portfolio. While ETFs are known for their comparatively low cost, understanding exactly how their fees work is crucial for any investor looking to maximize returns.

As such, while ETF fees are supposed to be transparent, they’re still opaque to most investors. Below, we take you through how these fees are deducted and how they impact your bottom line.

What Are ETF Fees?

ETF fees cover expenses for managing the fund. These costs include everything from paying the portfolio managers who make investment decisions to covering basic administrative tasks like record keeping and marketing.

The most significant cost for you is given in the expense ratio. This figure, expressed as a percentage, tells you how much you’ll pay annually for every dollar invested. For example, if an ETF has an expense ratio of 0.10%, you’ll pay $1 annually for every $1,000 invested. While this might sound small, these fees add up over time through compounding.

Actively Managed vs. Passive ETF Fees

The funds above represent two categories that quickly differentiate the kind of fees you can expect. Passively managed index funds have lower costs because administrative costs are less: managing funds that mimic and index like the S&P 500 is far easier than needing staff to pick the best stocks to fill out a fund’s portfolio.

Actively managed funds select securities from within different sectors and types of assets, aiming to increase gains based on the trading acumen of its managers. Below is a summary of the differences between actively managed and index funds:

Fund Types and Fees

Of course, these broad categories are still too broad to tell you what kind of expense ratios you should expect, given your investment strategy.

“When evaluating funds, not all fees are created equal,” Wilson told us. He pointed out that some asset classes are naturally more expensive to manage than others. For instance, ETFs focused on U.S. large-cap stocks typically charge lower fees because these markets are larger and more liquid than specialized markets like emerging market stocks or micro-cap companies.

Thus, you need to consider ETF fees in light of their strategies. For example, passively managed ETFs that track well-known indices like the S&P 500 and the Dow Jones Industrial Average tend to have very low fees because the cost of maintaining such portfolios is minimal. However, investors pay higher fees for actively managed ETFs or niche ETFs that require more research and active management, such as those focused on emerging markets or alternative assets like commodities.

In these cases, the higher fees may be justified if the fund manager’s strategy delivers superior returns or provides diversification that lower-cost funds can’t. For example, an ETF investing in Vietnamese small-cap stocks might justify a higher fee because of the complexity and cost of operating in that market. Similarly, an ETF using options strategies to generate income might warrant higher fees because of the expertise required.

Here are the different kinds of ETFs, with their general range of expense ratios (ranges taken from the ETF Database and the Investment Company Institute). Note that more specialized ETFs within any category may exceed these ranges, while it may be possible to find more passive ETFs that charge lower fees. These fee bands are not meant to be taken as rigid absolutes.

Broad Market Index ETFs (0.00% – 0.10%)

• Track major indexes like the S&P 500 or total stock market
• Lowest cost because of a simpler investment strategy and typically more extensive asset base
• Example: SPDR S&P 500 (SPY)

U.S. Large-Cap ETFs (0.00% – 0.12%)

• Focus on large American companies
• Highly liquid markets keep costs low
• Example: Proshares S&P 500 Dividend Aristocrats ETF (NOBL)

U.S. Bond ETFs (0.05% – 0.15%)

• Track U.S. government or corporate bonds
• Slightly higher costs because of more complex bond trading
• Example: iShares Core U.S. Aggregate Bond ETF (AGG)

International Developed Market ETFs (0.12% – 0.30%)

• Invest in foreign developed markets like Europe or Japan
• Higher costs because of international trading and currency management
• Example: Vanguard FTSE Developed Markets ETF (VEA)

Cryptocurrency ETFs (0.12% – 1.90%)

• Track cryptocurrency prices or crypto-related companies
• Higher costs because of complexity, security needs, and regulations
• Example: Grayscale Bitcoin Trust ETF (GBTC)

Real Estate ETFs (0.12% – 0.50%)

• Invest in real estate investment trusts (REITs)
• Higher costs because of real estate market research and analysis
• Example: iShares U.S. Real Estate ETF (IYR)

Commodity ETFs (0.25% – 0.75%)

• Track physical commodities like gold, silver, or oil
• Higher costs because of storage, insurance, and futures trading
• Example: SPDR Gold Shares (GLD)

Emerging Market ETFs (0.25% – 0.75%)

• Invest in developing markets like Brazil or India
• Higher costs because of complex trading and research requirements
• Example: iShares MSCI Emerging Markets ETF (EEM)

Sector or Industry-Specific ETFs (0.35% – 0.60%)

• Focus on specific sectors like technology or healthcare
• Higher costs because of specialized research and a smaller asset base
• Example: SPDR S&P Biotech ETF (XBI)

Leveraged/Inverse ETFs (0.90% – 1.50%)

• Attempt to multiply market returns or profit from market declines
• Highest costs because of complex derivatives trading and daily rebalancing
• Example: ProShares UltraPro Short QQQ (SQQQ)

How are ETF Fees Deducted from the Fund?

Unlike your monthly subscription from Netflix Inc. (NFLX) or annual credit card fee, you’ll never see ETF fees appear as a line item on your statement. Instead, these fees are subtracted from the fund’s NAV daily in tiny increments that add up to the annual expense ratio. Here’s the process in action:

1. Each day, the ETF company calculates the fund’s total value.
2. It subtracts the day’s portion of the annual fee.
3. This adjusted value becomes the new NAV.
4. The process repeats daily.

Let’s say an ETF has an expense ratio of 0.20% (or $20 annually per $10,000 invested). Rather than charging this all at once, the fund provider divides this annual fee by 365 and deducts about $0.055 per day for every $10,000 you have invested.

This behind-the-scenes deduction means investors don’t need to keep cash on hand to pay fees. However, it also means your actual returns are always slightly lower than the fund’s reported performance. For example, if an ETF tracking S&P 500 returns 10% in a year and has a 0.20% expense ratio, your actual return would be 9.80%.

Fees significantly impact your ultimate returns, which is why they are important. A $1,000 investment that grows by 7% yearly would be worth $1,970 in 10 years without fees. Subtract a 1% annual fee, and the result is $1,790. Fund expenses have eaten up about 10% of your potential portfolio.

Typical ETF Fees

When investing in ETFs, there are several types of fees. Here’s a comprehensive breakdown:

Trading Commissions

Brokers charge investors commissions for executing the buy and sell orders for the ETF shares for you. Historically, these fees could range from $5 to $25 per trade, but these have largely gone the way of paper charts and landlines—especially if shares are on U.S. exchanges.

When commissions are charged, they represent an immediate out-of-pocket expense that can affect short-term returns. Here’s where you’re most likely to find them:

1. Non-Core ETFs or Niche ETFs

• Specialized or /thematic ETFs: Funds focusing on niche markets, such as energy, cannabis, or blockchain, might not have partnerships with major brokerages, leading to higher commissions.
• Sector-specific ETFs: Funds focusing on particular industries (e.g., biotech or technology sub-sectors) may incur fees if they are from smaller or less mainstream issuers.

2. International ETFs

• ETFs that focus on international markets or are domiciled abroad may not be part of a brokerage’s commission-free list.
• Some of these ETFs trade less frequently and may be considered “foreign-listed,” incurring higher trading costs.

3. Non-Partner Funds

• Certain brokerages have specific lists of commission-free ETFs based on agreements with ETF providers. For example, if your brokerage doesn’t include an ETF issuer like Vanguard, you might pay a fee to trade Vanguard ETFs.

4. Leveraged and Inverse ETFs

• ETFs designed for short-term trading, including leveraged and inverse ETFs, might incur commissions if they’re not on the broker’s preferred list because of their high risk.

5. Low Liquidity ETFs

• ETFs with lower trading volume might incur extra fees because of their complexity and difficulty in execution.

To avoid these fees, check your brokerage’s list of commission-free ETFs and prioritize trading those that align with your investment goals.

Operating Expenses

These day-to-day costs include the following:

• Recordkeeping
• Accounting services
• Legal fees
• Custodial services
• Fund administration

These expenses are rolled into the ETF’s expense ratio and deducted daily from the fund’s assets.

Management Fees

Most of an ETF’s expense ratio goes toward compensating the fund manager. Passive ETFs that simply track an index usually charge minimal management fees since they require less effort to handle. However, actively managed ETFs that try to outperform their benchmark charge higher fees to cover the cost of research and more frequent trading decisions.

Marketing and Distribution Fees (12b-1 Fees)

While far less common in ETFs than mutual funds, some ETFs charge 12b-1 fees to cover the following:

• Marketing costs
• Advertising expenses
• Payments to financial advisors that are included in the expense ratio and typically range from 0.25% to 0.75% annually.

Securities Lending Revenue

Though not a fee paid by investors, it’s important to mention that many ETFs engage in securities lending—loaning out the underlying assets to other market participants, such as short-sellers, in exchange for a fee.

The revenue generated from securities lending helps offset some of the ETF’s operating expenses, reducing the fund’s net cost for investors. Some ETFs pass this revenue back to investors, which can slightly improve their returns.

Zero-Fee ETFs: Less Costly But Buyer Beware

Zero-fee ETFs have been around since the start of the decade, offering investors a cost-free way to access diverse markets. Prominent examples include BNY Mellon’s US Large Cap Core Equity ETF (BKLC), BNY Mellon’s Core Bond ETF (BKAG), and Gabelli’s Growth Innovators ETF (GGRW). These funds have 0% expense ratios, a stark departure from the industry norm; they’re achieved through fee waivers or subsidies to attract investors. That said, they have yet to do so in mass waves, with AUMs in the millions or low billions.

These ETFs might seem like a game-changer for those prioritizing low costs. With expense ratios at zero, you can avoid the ongoing drag fees inflict on your returns. BKAG, for example, provides exposure to thousands of high-quality bonds, making it an attractive choice for fixed-income investors, while SFY and SFYX cater to large- and mid-cap growth enthusiasts. Others cover more volatile assets, including cannabis and crypto.

However, caution is warranted. Here’s what you need to do, besides carefully reviewing any rebate structure, the assets managed, and the management’s track record:

• Understand revenue sources: Fee waivers might not last indefinitely. For instance, SoFi Technologies Inc.’s (SOFI) funds waive part of management fee. However, contract agreements as of April 2025 note these partial waivers are only in place until “at least June 2025”.
• Assess liquidity: With far fewer assets under management and far fewer shares trading hands than the major index ETFs—GGRW has a modest $5.4 million in AUM as of April 2025—which may result in wider bid-ask spreads, raising transaction costs.
• Compare alternatives: ETFs like SPDR’s Portfolio S&P 500 ETF (SPLG) or Vanguard’s Total Bond Market ETF (BND) charge just 0.02%-0.03% can provide portfolio diversification depending on your holding preferences.

While zero-fee ETFs are appealing, investors must weigh these benefits against risks, including liquidity challenges and the possibility of future fee increases. As such, the cheapest option could end up costing you more.

Why ETF Fees Matter

Fees Directly Impact Returns

ETF fees are deducted directly from the fund’s assets, meaning they reduce the net returns investors receive. For example, if an ETF generates a 7% annual return and has an expense ratio of 0.50%, the investor’s net return will be 6.50%. This deduction happens continuously, as fees are taken out daily, meaning investors don’t see these charges separately but experience them as slightly lower returns.

While a 0.50% expense ratio might not seem like much in the short term, over time it can significantly reduce your returns due to the compounding effect. For instance, an investor who invests $10,000 in an ETF with a 0.50% fee over 30 years at a 7% return will end up with about $66,000.

In contrast, investing the same amount in an ETF with a lower fee of 0.10% would have resulted in roughly $75,000 over the same period. That’s a $9,000 difference due solely to the fee structure, and this shows how small percentages can compound into large sums.

Long-Term Compounding of Fees

The longer the investment horizon, the more ETF fees compound and reduce overall gains. This is particularly important for investors with long-term goals such as retirement savings. For example, a 0.50% fee on a $100,000 portfolio can cost $500 per year in explicit fees. However, because those fees cut the amount of capital available to earn returns, the loss compounds over time.

If we project this over 30 years, with the same $100,000 earning a 7% annual return, we get the following:

• Without fees, the portfolio would grow to $761,225.
• With a 0.50% annual fee, the portfolio would grow to $660,753.

Low-Cost ETFs vs. High-Cost ETFs

One of the primary reasons investors are drawn to ETFs is their typically lower expense ratios compared to mutual funds. However, not all ETFs are created equal, and fees vary widely. For example, many passively managed ETFs that track major indexes like the S&P 500 could have expense ratios lower than 0.10%. On the other hand, some actively managed ETFs, especially those using complex strategies or focused on niche markets, may charge 0.75% or even higher.

Let’s compare two ETFs:

• ETF A: Passively tracks the S&P 500 with an expense ratio of 0.05%.
• ETF B: Actively managed small-cap growth fund with an expense ratio of 0.85%.

Over 20 years, assuming both ETFs achieve the same gross return of 8% per year:

• ETF A (0.05% fee) would provide a net return of about 7.95% annually.
• ETF B (0.85% fee) would yield a net return of 7.15%.

This seemingly small difference in annual returns translates into a massive divergence in outcomes. On a $10,000 investment over 20 years:

• ETF A would grow to approximately $47,875.
• ETF B would grow to only $39,658.

How To Find Your ETFs Fees

Here are a few ways to easily find out the fees charged by an ETF:

Check the ETF’s Prospectus or Fact Sheet

The prospectus or fact sheet will clearly list the ETF’s expense ratio, which is the primary fee you’ll pay as an investor. You can find this document on the fund provider’s website or through your brokerage.

Look Them Up on Reputable Financial Data Platforms

Most financial news websites, broker platforms, or ETF screener tools will list the expense ratio of ETFs, making it easy to compare across different funds.

Use Online ETF Comparison Tools

Many online platforms and brokerage websites offer ETF comparison tools, which allow you to compare fees among multiple ETFs. These tools often provide detailed breakdowns of the different costs associated with owning ETFs, including operating expenses, management fees, and more.

Review Your Brokerage or Trading Platform

When you purchase an ETF through your broker, you might incur additional costs like trading commissions. Some brokers offer commission-free ETFs, while others may charge a fee per trade. You want to be sure to check with your broker to understand any transaction-related fees before investing.

ETF vs. Mutual Fund Fees

ETFs and mutual funds have long vied for investors’ dollars, but the landscape for fees has significantly evolved. Once known for their high costs, mutual funds now compete closely with ETFs in terms of affordability, reshaping a still-often told story about how mutual funds are pricier than ETFs.

The Historical Fee Gap

Traditionally, ETFs were the cost-conscious investor’s choice. ETFs, which track indices or baskets of securities, have historically offered expense ratios as low as 0.03% to 0.25%, far below the 1% to 2% average for actively managed mutual funds. This made ETFs particularly attractive for passive investors.

How Things Have Changed

In recent years, mutual fund providers have responded to competitive pressure by slashing fees, especially for index mutual funds. Some index funds now offer expense ratios that rival or even undercut, ETFs. For example, major players like Vanguard and Fidelity have introduced mutual funds with expense ratios as low as 0.02% to match ETF prices​​.

Key Differences in Fee Structures

1. Additional fees: Both mutual funds and ETFs competitive ratios. However, some mutual funds may still charge additional fees, like load fees (sales commissions), which ETFs very generally try to avoid.
2. Trading costs: ETFs trade like stocks, which means investors incur brokerage fees unless using commission-free platforms. Mutual funds often don’t have trading costs but may require a minimum holding period to avoid redemption fees.
3. Tax efficiency: ETFs are often more tax-efficient because of their in-kind creation and redemption process, minimizing capital gains distributions. Mutual funds may trigger taxable events more frequently​​. That’s because when you redeem shares in a mutual fund, the fund may have to sell securities to generate cash, which can result in capital gains being passed on to all investors in the fund, even if they haven’t sold their shares. These capital gains distributions are taxable, often resulting in a higher tax burden compared with ETFs.

The Bottom Line

Despite getting lower in the past few decades, ETF fees are not to be overlooked. They are automatically deducted daily from the fund’s assets and, though seamless, can still have a long-term impact on your returns because of compounding. Ultra-low-cost ETFs, including zero-fee options, offer attractive products for cost-conscious investors. However, they come with caveats and trade-offs when compared with funds with slightly higher expense ratios.

Investors should weigh these considerations carefully and compare ETFs not just on expense ratios but also on liquidity, risk tolerance, and how the fund aligns with your financial goals. Focus on funds that offer value in both cost and performance.