The operational costs borne by an investor in an ETF portfolio can be divided into direct and indirect costs.

 

1. Fund Fees

These are the internal costs of each ETF, always disclosed in the prospectus or offering memorandum as the Expense Ratio. They include the management company's fees, payments for auditor and custodian services, as well as fees paid to the index provider that the ETF is based on. All these costs are known in advance and range from 0.1% for the largest, most liquid funds to 1-2% for leveraged or exotic ETFs. Nevertheless, they are multiple times lower than the costs of traditional discretionary wealth management.

 

These commissions arise when executing ETF trades on the exchange. They are typically very insignificant for the largest index funds. Some brokers even waive commissions entirely for trading major index ETFs.

 

 

 

This cost is primarily noticeable when trading small or illiquid ETFs and can be minimized by using limit orders.

 

This arises from the need for funds to maintain a certain minimum cash position for settlements with shareholders and to cover commissions and internal operational costs. For large ETFs, the tracking error generally does not exceed the fund's direct expenses.

 

 

ETFs are usually treated like ordinary stocks, so the taxation of an ETF portfolio is no different from that of a classic securities portfolio. Taxable events will be triggered by portfolio rebalancing when certain positions require a decrease in size (through sales) or complete liquidation. However, there is a way to avoid or minimize the creation of tax liabilities during rebalancing dates. To do this, an investor should regularly contribute new funds to the portfolio, increasing its total value. Having available cash in the portfolio will minimize the need for internal sales and, consequently, reduce the investor's taxable base.