In general, if you’re investing in a passive index tracking ETF, aim for an expense ratio of 0.09% or below. If you’re investing in thematic ETFs or actively managed ETFs, expect higher expense ratios of more than 0.5%.
In this article, I analyzed ETFs across different sectors and share their average expense ratios in greater detail.
I regard ETFs as the best way to compound savings and earnings over a long holding time frame, with minimal effort, and with optimum cost.
I know friends and have met individuals who try their very best to do pick winning stocks. But their desired outcomes are often just a one-off or occasionally 10-20% gain, hence they can rarely bank on stock picking to achieve their financial independence.
And if you can’t stomach the risk and the gyrations, it is okay. ETF investing, even the index tracking ETFs are safe and passive bets for you to compound your savings.
But the caveat is, they do not come free. There is an annual expense ratio that you need to be aware of.
That said, since there are so many types of ETFs and none of them are free…
What is a good Expense Ratio for ETFs?
There are now so many different types of ETFs in the market. They range from plain vanilla index-tracking ETFs to niche thematic ETFs.
How actively or passively the ETF is being managed usually affects how “cheap” or “expensive” an ETF will be. In most cases, passive index-tracking ETFs tend to have a very cheap and affordable expense ratio. While the thematic ETFs can be as pricey as they can be.
So to really provide a well-rounded answer, I think it’s only best to go by category.
Equity ETFs expense ratios
Good expense ratios for Equity ETFs are in these ranges:
- passive index tracking ETFs: 0.09% or below
- thematic ETFs: ~0.5% – 0.9%
- Average expense ratio of Equity ETFs: 0.51%
Equity ETFs track an index or portfolio of equities. These ETFs can be index tracking or thematic.
The rather well-known index-tracking plain vanilla ETFs include SPY, IVV, VOO, VTI, and QQQ.
From the range, the average expense ratio for the 883 ETFs available is 0.51%. However, if you opt for the well-known index trackers, expect an expense ratio of 0.03%, up to 0.2%. For example, Invesco’s QQQ Trust skews towards investing in tech-reliant firms and delivers a general outperformance against the standard index, it commands a higher expense ratio.
But for general index tracking, best to either aim 0.09% or below.
As for thematic and wacky ETFs, there is no limit on how much the ETF can go.
ARK’s thematic ETFs, command an annual expense ratio between 0.75% and 0.79%.
These days, you can invest in anything through ETFs. Even bonds have ETFs as well.
Bond ETFs
If you’re investing in Bond ETFs, good expense ratios are in the range of:
- Large bond ETFs: < 0.1%
- Bond ETFs with specific investment objectives: >0.2%
- Average expense ratio of a bond ETF: 0.35%.
The average expense ratio of a bond ETF is 0.35%. But the largest bond ETFs have a far lower expense ratio than that.
If risk aversive is your game plan, then opting for the top few largest bond ETFs with an expense ratio of lesser than 0.10% should be a better deal.
Commodities ETFs
Good expense ratios for Commodity ETFs are in these ranges:
- Larger commodity ETFs: <0.5%
- Niche commodity ETFs: 0.5% – 0.1%
- Average expense ratio of Commodity ETFs: 0.70%
The largest commodity ETF by AUM is none other than the SPDR Gold Trust.
Gold is always looked upon as a safe haven, but it is in fact part of the commodity ETF family.
The average expense ratio of commodities ETFs is around 0.70%, as it requires much more active management.
However, if you are just dabbling in some Gold ETFs as a portfolio hedge, the larger one’s with an expense ratio below 0.5% are good choices.
Cryptocurrency ETFs
- The average expense ratio for Cryptocurrency ETFs is 0.95%.
For those who trust the prospects of cryptocurrency but cannot bear to take the risk by going long directly on cryptos, ETFS too can play a part in diversification.
There are currently 9 crypto ETFs available, and they are not cheap in terms of expense ratio.
The average expense ratio is 0.95%, with some going up to as high as 1.59%.
Alternative ETFs: Volatility ETFs
- Volatility ETFs tend to be more expensive with the average expense ratio being at 1.07%.
A segment of ETFs that recently became pretty receptive to the public.
There are many types of alternative ETFs, but the ones that have gained public recognition would be the volatility ETFs. These ETFs allow you to track the volatility of various indices, with some allowing you to bet on the direction of the underlying indices too.
There are currently 13 ETFs for volatilities, the much well-known one is VIX.
The average expense ratio is 1.07%, and the higher expense ratios are contributed by the leveraged or short VIX variants.
So…how much is too much to pay for an ETF?
For different types of ETFs, there will be a different range of expense ratios that justifies an ETF’s expense ratio against what it brings to the table. Hopefully, the breakdown of ETFs into different categories has helped provide a clearer range by segment.
Naturally, the more passive and less active, the lower the expense ratio, and somehow also the lower risk of the particular ETF.
The more sophisticated and higher return an ETF promises, the higher the expense ratio as well.
One tip I can offer is this: always opt for the larger AUM and also more liquid ETFs as either the go-to choice or a benchmark against another ETF that caught your eye. If the expense ratio is not too overwhelmingly more than the others, then there is little room for error for the choice.
Frequently Asked Questions
How to find funds with low expense ratios?
If your goal is to invest in cheap ETFs, then consider passive index tracking ETFs.
If your goal if to find the cheapest ETFs that offer you specific investment objectives, you can use ETF screeners like ETF.com, ETFDB.com, JustETF.com to screen for specific ETFs based on their expense ratios.
What else you should consider about expense ratios?
While cost is an important consideration when selecting the best ETFs for your portfolio, you should also consider the following:
- Assets under management (AUM): This gives you an idea of the size of the ETF. In general, the larger the AUM, the more liquidity and stability. You should compare the AUM of an ETF against its competitors for a clearer idea.
- Tracking error: the lower the tracking error, the closer the performance to the underlying index.
New to ETFs? Read our guide to ETF investing before you buy!
