18 Jun 2025

How do ETF fees work? Expense ratios and other costs

Like all investment funds, ETFs charge fees to manage investor capital. However, since ETFs are generally passive funds, their costs are typically lower than those of other investment products.

While the average managed fund charges an annual fee of 0.93%, ETF fees are just half this level.[1]

However, ETFs can also have hidden costs that aren’t always obvious upfront. In this guide, we’ll break down the different fees associated with ETFs and show their true impact on investor returns.

What are ETF fees?

In simple terms, ETF fees are the expenses investors incur to gain exposure to the investment fund. The most well-known ETF fee is the management fee, also known as the fund’s expense ratio.

Some ETFs may also charge a performance fee, typically expressed as a percentage of fund returns above a certain threshold, but this is rare.

In addition, brokerage platforms can charge investors a brokerage fee to buy or sell ETF shares.

Besides these visible fees, there can also be hidden costs associated with owning an ETF. These include taxes, bid-ask spreads, tracking errors, slippage, and purchasing shares at a premium to NAV. Each of these invisible fees impacts an ETF’s total cost and will be discussed in more depth below.

🎓 Learn more: How to start investing in ETFs as a beginner

Understanding ETF expense ratios

An ETF’s expense ratio is the headline cost associated with owning the fund. This fee is typically expressed as a percentage of the fund’s assets on an annual basis. The expense ratio is used to cover portfolio management costs, custodial fees, and any accounting & administrative expenses from the manager’s service providers.

The Vanguard Australian Shares Index ETF ($VAS), for example, currently charges a management fee of 0.07% annually, or $7 for every $10,000 invested.

Investors don’t have to pay this directly to Vanguard. Instead, the expenses are automatically deducted from the fund’s assets on an ongoing basis.

Vanguard is known as a low-cost index fund provider, and specialised or active ETFs may charge a higher expense ratio.

For example, the Betashares Strong Australian Dollar Complex ETF ($AUDS) is a currency-focused fund that currently charges an expense ratio of 1.38%. According to the ASX, the average expense ratio of all ETFs listed on the exchange is 0.54%.[2]

ETF fee example

To better understand how ETF fees work, let’s consider how expense ratios are paid in practice. Note that this process may differ depending on individual fund mechanics.

Suppose that an investor purchases $10,000 worth of shares in the $VAS ETF, which carries a 0.07% expense ratio. Although expense ratios are quoted on an annual basis, they are charged daily. After dividing by 365, we find that our investor pays roughly 2¢ in fees each day on their $10,000 investment, assuming no changes in asset values.

Investors do not have to pay these fees directly – the manager deducts them from the assets of the fund. Suppose that our investor holds this Vanguard fund for one year, paying $7 in management fees, in addition to a $3 brokerage fee on their purchase & sale. In this case, the investor’s total visible cost would be $13, or 0.13% of their investment for one year.

Other costs involved in ETFs

Although management fees and brokerage may be obvious upfront, there are sometimes other costs of owning an ETF. Below, we describe some of the important invisible fees associated with ETFs.

Tax distributions

ETFs come with all the typical taxes associated with investing, including taxes on dividends or capital gains. However, some funds may also ‘pass through’ capital gains taxes incurred from rebalancing their portfolio to investors. With that said, the unique in-kind redemption method used by ETFs can significantly lower the impact of this type of tax distribution when compared to managed funds.

Bid-Ask spreads

Investors purchasing ETF shares using a market order may have to pay the ‘bid-ask spread.’ This spread is a fee paid to market makers for providing liquidity and can be avoided by using a limit order. Popular ETFs typically have low bid-ask spreads, however, meaning this cost may not be significant.

Tracking errors

Most ETFs are passive products designed to track a benchmark index. There are several reasons that a manager may fail to perfectly track the underlying index (including management fees or asset illiquidity). While this ‘tracking error’ is typically low for reputable managers, it reflects underperformance that can erode returns compared to the benchmark index.

Slippage

In some cases, investors purchase shares expecting to pay a certain price, only to end up paying a higher one. The difference between the two prices is known as ‘slippage,’ and can occur when an investor purchases a large block of shares in a relatively illiquid ETF, pushing up the price temporarily. While slippage is unlikely to be a major factor for retail investors purchasing popular ETFs, it’s a potential hidden cost worth being aware of.

Shares are trading at a premium

Like any investment fund, ETFs have an underlying net asset value (NAV), reflecting the actual assets that the fund holds. In some cases, the share price of an ETF can rise above this NAV, trading at a ‘premium.’ This essentially means that investors are overpaying for the fund’s underlying assets, potentially impairing future returns. While ETF premiums are typically small, share prices can become dislocated from NAVs in particularly volatile markets.

How ETF fees impact your investment returns

Fees can have a significant impact on investor returns over time, especially when the dynamics of compound growth are considered.

For example, consider two investors who each buy $10,000 worth of shares in a fund that returns 10% annually.

Investor A pays fees of 1.00% per year, while investor B is charged just 0.50%.

While a 50 basis point fee difference may not seem like much, it can add up over time:

After one year, investor A has paid $100 in fees, meaning his investment has grown to $10,900. Investor B, meanwhile, has paid just $50 in fees, meaning her investment has grown to $10,950.
After five years, the difference in the two portfolio amounts is still just $356. By year ten, however, investor B’s portfolio is worth $1,109 more than investor A.
After 20 years, investor B’s capital is $5,372 greater than investor A. And by 30 years, the investment is $19,526 larger – nearly twice the initial investment amount.

Year	Investor A Investment	Investor B Investment	Investment Returns Difference
1	$10,900.00	$10,950.00	$50.00
5	$15,386.24	$15,742.39	$356.15
10	$23,673.64	$24,782.28	$1,108.64
20	$56,044.11	$61,416.12	$5,372.01
30	$132,676.78	$152,203.13	$19,526.35

This example shows how even a small difference in fees can have significant long-term impacts to potential returns.

If we assume that investor A was actively trading his portfolio, this difference becomes even more severe. If investor A paid just $50 in total commissions per year, the final wealth difference expands to $26,342, highlighting the potential power of buy-and-hold investing.

Can I minimise the impact of these fees?

Generally, it’s not possible to avoid the impact of ETF fees entirely. ETF fees are charged by fund managers to provide their services, without which they could not cover their operating expenses. However, there are a few strategies investors can use to minimise the overall impact of ETF fees on their portfolio:

Consider a low-cost manager: Certain investment management firms have a reputation for lower costs than others. ETFs from Vanguard and iShares, for example, are generally considered cheaper than industry peers. These managers typically operate index funds, so they can charge lower fees than active competitors.
Focus on popular, liquid ETFs: ETFs with a significant volume of assets under management and greater liquidity can help investors minimise fee impacts. These ETFs often have small bid-ask spreads with shares that trade close to NAV.
Prioritise buy-and-hold investing: Investors who actively trade their portfolio may accumulate more brokerage fees than those focused on a buy-and-hold strategy. Over the years, the impact of these fees can add up.

As always, investors should conduct their own research to ensure their investment strategy aligns with their financial goals. Consider consulting with a financial professional for personalised guidance on minimising the impact of fees.

ETFs fees FAQs

Which ETFs have the lowest fees?

On the ASX, one of the lowest-cost ETFs available is the Betashares Australia 200 ETF ($A200), which has an expense ratio of just 0.04%.

In the U.S., ETFs like the Vanguard Total Stock Market ETF ($VTI) and iShares Core S&P 500 ETF ($IVV) have expense ratios of 0.03%.

Generally, index ETFs from large asset managers will carry the lowest fees.

Do ETFs or managed funds have higher fees?

Managed funds typically have higher fees than ETFs.

For example, according to the ASX’s monthly investment products roundup, the managed funds they cover charge an average expense ratio of 0.86%.[2]

In comparison, that figure is just 0.54% for ETFs.

Is it worth paying a higher ETF fee?

It can occasionally be worth paying for an ETF with a larger expense ratio, but it depends on an investor’s specific financial goals.

Often, ETFs with an actively managed strategy or those focused on a specific theme or sector can have a higher fee.

For investors considering two index ETFs focused on similar benchmarks, the fund with the lower expense ratio can often be the deciding factor.

Disclaimer

The information contained above does not constitute financial product advice nor a recommendation to invest in any of the securities listed. Past performance is not a reliable indicator of future performance. When you invest, your capital is at risk. You should consider your own investment objectives, financial situation and particular needs. The value of your investments can go down as well as up and you may receive back less than your original investment. As always, do your own research and consider seeking appropriate financial advice before investing.

Any advice provided by Stake is of general nature only and does not take into account your specific circumstances. Trading and volume data from the Stake investing platform is for reference purposes only, the investment choices of others may not be appropriate for your needs and is not a reliable indicator of performance.

$3 brokerage fee only applies to trades up to $30k in value (USD for Wall St trades and AUD for ASX trades). Please refer to hellostake.com/pricing for other fees that are applicable.