Top two costs for ETFs
- Sales commissions: Like a stock, you pay fees to your broker when you buy or sell an ETF.
- Management fees: Like a mutual fund, your costs include fees for managing and operating the fund. This is called the Management Expense Ratio (or MER). The MER for an ETF is often lower than what you would pay for a regular mutual fund. Why? An ETF simply follows an index. There isn't a lot of research into investments or much buying and selling. This keeps the MER low. Equity mutual fund MERs in Canada average about 2.4% a year; for ETFs, most MERs are less than 0.5%.
Tip: Unlike many mutual funds, ETFs do not reinvest your cash distributions in more shares. Instead, one of two things will happen:
- The cash will gather in your acount until you tell your broker how you want to invest it. You will have to pay commission or sales charges on whatever you buy. OR
- Your broker may offer a program to automatically buy more ETF shares for you. You likely won't pay extra commission or sales charges. While not offering a tax break, this can help reduce some of your costs so that you earn more from your ETF investment.While not offering can help reduce some of your costs so that you earn more from your investment.
Taxes on ETFs
If you hold your ETFs inside a tax-sheltered account such as a Registered Retirement Savings Plan (RRSP), you won't pay tax on what you make investing until you take the money out. With unsheltered ETF investments, you will pay tax on any capital gains from an ETF when you sell.
You will also pay tax yearly on any dividends (called distributions). Many ETFs pay dividends less often than mutual funds, however. This gives you a bit of tax break while you hold the investment.
Remember: Costs and taxes will reduce what you make from an ETF
Some funds cost more to own than others. Be sure to read the ETF's prospectus to find out more.
Content in this section is provided in partnership with the Investor Education Fund, a non-profit organization promoting financial literacy to Canadians. To find out more go to GetSmarterAboutMoney.ca.