Author Topic: How are an ETF's expense ratio fees paid?  (Read 2182 times)

seattleite

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How are an ETF's expense ratio fees paid?
« on: May 27, 2016, 11:24:50 AM »
I've searched all over the place but I can't find the answer.

How are an ETF's expense ratio fees paid? They clearly don't take away some of my shares each year to pay for them. So it must be the underlying assets that my shares represent that are reduced in value, right?

Does anyone know how this happens? Do they take some of the underlying assets from me once a year? Continuously?

I'm confused.

boarder42

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Re: How are an ETF's expense ratio fees paid?
« Reply #1 on: May 27, 2016, 11:31:42 AM »
They are built into the price so if the etf is at 100 dollars at year end with a .05% expense ratio it would actually be at 100.0005 at the end of the year if it have any expenses. 
« Last Edit: May 27, 2016, 12:38:12 PM by boarder42 »

Paul der Krake

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Re: How are an ETF's expense ratio fees paid?
« Reply #2 on: May 27, 2016, 11:46:10 AM »
All funds, index or not, keep cash on hand, in order to smooth the buying and selling of the underlying securities. There are some nifty strategies employed to front-run the purchases so that when corp XYZ moves into the S&P500, not every fund that tracks it suddenly has to buy it.

Read this for more information on how the tracking occurs:

https://www.bogleheads.org/wiki/Vanguard_bond_index_fund_tracking_error

forummm

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Re: How are an ETF's expense ratio fees paid?
« Reply #3 on: May 27, 2016, 11:53:33 AM »
They are built into the price so if the etf is at 100 dollars at year end with a .05% expense ratio it would actually be at 100.0005 at the end of the year if it have any expenses. 

It would be roughly $100.05 actually.

Murse

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Re: How are an ETF's expense ratio fees paid?
« Reply #4 on: May 27, 2016, 12:19:24 PM »
They are built into the price so if the etf is at 100 dollars at year end with a .05% expense ratio it would actually be at 100.0005 at the end of the year if it have any expenses. 

It would be roughly $100.05 actually.

Okay, but wouldn't that only be the fee for year one? What about year 2?

boarder42

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Re: How are an ETF's expense ratio fees paid?
« Reply #5 on: May 27, 2016, 12:38:27 PM »
They are built into the price so if the etf is at 100 dollars at year end with a .05% expense ratio it would actually be at 100.0005 at the end of the year if it have any expenses. 

It would be roughly $100.05 actually.

got 0 happy fixed.

MustacheAndaHalf

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Re: How are an ETF's expense ratio fees paid?
« Reply #6 on: May 27, 2016, 01:55:14 PM »
Let me speculate on what I know until a real expert replaces this with something better...  The Vanguard S&P 500 actually uses derivatives for the last few percent of it's holdings.  So very roughly speaking, it's holding 95% stocks, and some leveraged options for the last 5%.  That allows Vanguard S&P 500 to keep a cash reserve for expenses and people selling their shares.

So my educated guess is the fund expenses come out of the fund's cash.  That cash in turn helps act as margin for derivatives, and those derivatives track the S&P 500.  That's how Vanguard S&P 500 gets so close to it's target index while investors are buying and selling.

I suppose the one liner is "expenses / expense ratio is paid (quarterly?) from the fund's internal cash account."

nobodyspecial

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Re: How are an ETF's expense ratio fees paid?
« Reply #7 on: May 27, 2016, 06:01:17 PM »
The tracking error for some of the largest and most  liquid ETFs  is actually negative due to the fund holder front running and dark pools - so they could charge no MER at all and still make money.

I think this is how a couple of brokers run their "we beat Vanguard's mer" loss leaders