- Before buying an ETF, check how its fees compare with those of other similar strategies and other asset classes.
- While index ETFs are often cheaper, active ETFs generally charge more.
- Fees on alternative strategy ETFs have been rising.
Exchange-traded funds tend to charge lower fees than mutual funds, but that doesn’t mean all of them are cheap. High-fee ETFs still bubble up in certain corners of the market, namely active ETFs and alternative ETFs.
Most alternative ETFs fall into the more expensive fee quintiles. Their average fee of 1.77% has been climbing over the past five years. The increase comes from a combination of expensive new launches and existing ETFs dropping their fee waivers and incurring higher operating costs.
While alternatives exposure can benefit certain portfolios, what investors pay in fees comes directly out of returns. Many pricier alternative ETFs use options in their portfolios, like covered-call strategies. They pander to investors’ income needs, but they tend to come with higher fees and bear the opportunity costs of lost upside potential for upfront cash flow. Those traits can significantly dampen their long-term performance.
Active ETFs charged an average premium of 20 basis points versus their passive counterparts. Yet their benefit isn’t immediately clear. The cheapest-quintile of active stock ETFs churned out similar five-year total returns as their passive counterparts, on average, while active ETFs in other fee quintiles underperformed their average passive peers.
ETFs and passive investing are both cheaper on average, but that doesn’t mean all passive ETFs are cheap. For instance, Global X’s passive alternative ETFs charge more than some active alternative ETFs from other firms. Most of these funds fall into the more expensive half of their respective categories.
