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How to Minimize Costs

Whether you are an active trader or barely touch your portfolio, there are practical ways you can reduce the cost of your ETF exposure. High-frequency traders should focus on the indirect costs of trading – namely, the tracking error and bid/ask spread. These costs can add up quickly if you are executing many trades each month. One of the best ways to overcome high costs is to select liquid funds whose performance closely mirror their underlying benchmark.

For infrequent traders, the indirect costs are less relevant because you intend to hold the asset for a long time. In this case, it doesn’t matter how much the bid/ask spread fluctuates or whether underlying liquidity is low. If you are in this boat, focus on ETFs with a lower expense ratio that trade close to their NAV.

To calculate an ETF’s cost for one year, there are three immediate factors you need to consider:

  • The expense ratio (it remains as a percentage)
  • The per-year bid/ask spread percentage
  • The per-year commission (multiple the commission fee by two, divide by the total dollar amount and then multiply by 100)