Exchange traded funds are toted as a cheap and efficient investment vehicle that anyone can easily access. However, not many investors fully understand the elements that go into total cost of ETF ownership. "It's just understanding the components. So, we've developed a formula that really breaks it into the two main variables: you have issuer control costs and then you have investor control costs," Matt Bartolini, Head of SPDR Americas Research, State Street Global Advisors, said at the Charles Schwab IMPACT conference.
Bartolini explained that the issuer side costs may be comprised of directly stated components like expense ratio fees, along with indirect components like portfolio management efficiency or how well the manager tracks an intended benchmark to limit tracking errors. Furthermore, issuers may engage in securities lending programs to generate additional revenues, which may then be passed on to investors as a way to pare down fees.
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