Small Savings That Compound Into Large Sums

You can cut the cost of investing in ETFs in four main ways: pay less to own the fund, pay less when you trade it, pay less tax on what it earns and pay less for any help you use. Each saving looks small on its own. Together, and compounded over decades, they can add tens of thousands of dollars to what you keep.

This checklist sets out 25 practical ways to lower your costs, from choosing funds and placing trades to tax planning and adviser fees. None of them requires you to take more risk or predict the market. They simply stop money leaking out of your portfolio.

Why risk thousands of dollars learning through mistakes when you can learn before investing? FRC’s three ETF programmes, ETF Investing for Beginners, ETF Investing Strategies and Advanced ETF Investing, teach you to spot every one of these costs and keep more of your return. They are written in plain English, need no finance degree, and are open to everyone.

This guide is part of FRC’s complete step-by-step guide to investing in ETFs. FRC does not recommend specific funds or give personal tax advice, so use this list to ask better questions of your own investments.

Small Savings That Compound Into Large Sums

Every dollar you save in costs stays invested and keeps growing. On $100,000 invested for 30 years at 7% a year before fees, the difference between a 0.03% and a 1% annual cost is roughly $180,000. Cost is one of the few things in investing you can control with certainty.

The 25 ways below are grouped by when the cost arises: when you choose a fund, when you trade, while you hold it, at tax time, and in the help you pay for.

Cutting Costs When You Choose a Fund

Start With Broad-Market Index ETFs

Broad index ETFs that track the whole US or global stock market are among the cheapest investments available. Many charge between about 0.03% and 0.10% a year, while niche, sector and thematic funds often charge several times more. Building the core of your portfolio from broad funds keeps your average cost low from the start.

Compare Expense Ratios With Similar Funds

When two ETFs follow the same index, the cheaper one usually comes out ahead over time. Compare each fund’s expense ratio with others tracking the same index, and with the typical fee for its category. If you are paying well above the norm, check what you are getting for it.

Check Tracking Difference, Not Just the Fee

Tracking difference is the gap between the fund’s return and its index’s return. It captures costs the expense ratio misses, such as internal trading and cash drag, as well as income from securities lending that can partly offset fees. A fund that consistently trails its index by more than its fee may have hidden costs, so check several years, not one.

Look at the Fund’s Turnover

A fund that replaces a large share of its holdings each year pays more in internal trading costs, which never appear in the expense ratio. The turnover ratio in the prospectus gives you a guide. Low turnover usually means lower hidden costs and fewer taxable distributions.

Read the Small Print on Fee Waivers and Zero-Fee Funds

Some funds temporarily reduce their fee, and the prospectus shows both the gross expense ratio and the net figure after waivers, so you can see what you might pay once a waiver ends. A handful of funds charge nothing at all, but some are only available through one broker, which can make moving your account harder. A zero fee also leaves spreads, trading costs and taxes untouched.

Pay for Active and Specialist Funds Only When They Earn It

Actively managed, leveraged, inverse and commodity ETFs routinely charge from around 0.50% to more than 1.50% a year. Active managers try to beat a benchmark; some do, many do not. Check whether a fund has delivered after fees over a long period, and whether a cheaper fund could give you the exposure you need.

Avoid Tiny Funds at Risk of Closing

Very small ETFs with few assets and little trading tend to have wider spreads and face a higher risk of closure. When a fund closes, it sells its holdings and returns cash to investors, which can create an unwanted tax bill in a taxable account and leaves you paying to reinvest elsewhere. Check a fund’s size and trading volume before buying.

Avoid Paying Twice for the Same Holdings

Owning several ETFs that hold the same large companies means paying several fees for largely the same exposure. FRC’s guide on how to check ETF overlap shows how to find it. Fewer, broader funds often cost less and diversify more.

Don’t let a lack of investment knowledge become the most expensive mistake you ever make. ETF Investing for Beginners shows you how to read a fund’s fee table, tracking difference and holdings before you buy.

Cutting Costs When You Trade

Favour Liquid ETFs With Narrow Spreads

Every trade costs you the bid-ask spread, the gap between the buying and selling price. For the largest ETFs it can be a cent or two per share, but for thinly traded funds it can cost more in one trade than a year of fees. Remember that an ETF is only as liquid as what it holds, so funds of hard-to-trade bonds or small companies tend to cost more to trade.

Use Limit Orders, Not Market Orders

A limit order sets the most you will pay or the least you will accept. It protects you from a poor price when spreads widen or prices move quickly. A market order fills at whatever price is available, which can be costly in a fast-moving or thinly traded market.

Avoid the First and Last 30 Minutes of the Day

Spreads are often wider just after the market opens, while prices for the underlying holdings settle, and just before it closes. Trading in the middle of the day usually gets you a fairer price.

Trade International ETFs When Their Markets Are Open

An ETF holding foreign stocks trades during US hours even when its underlying markets are closed. With no live prices to work from, market makers widen spreads to protect themselves. Trading when the underlying market is open, such as the US morning for European stocks, usually gets you a tighter spread.

Avoid Trading Around Major Economic Announcements

Spreads and prices can swing sharply around major data releases, such as monthly jobs figures, and central bank interest rate decisions. Unless you need to trade at that moment, waiting until markets settle can save you money on both price and spread.

Watch for Premiums and Discounts

An ETF can trade above or below the value of its holdings, its net asset value. Bond and international ETFs are most prone to this, especially during market stress. Check the gap before you trade, as most providers publish it on the fund’s website.

Use a Low-Cost Broker and Consolidate Your Accounts

Most major US brokers no longer charge commissions on online ETF trades, but some still charge for certain accounts, funds or phone orders. Read the full fee schedule, including account, transfer and inactivity charges. Keeping your investments with fewer providers can also reduce platform fees and make your costs easier to track.

Watch Currency Conversion Fees

If you buy ETFs listed in another currency, or invest from outside the US, your broker may charge to convert your money. These fees are often a percentage of the amount converted and can be larger than the commission. Ask for a written list of every fee on your account, including currency and custody charges.

Understand the risks, costs and mechanics before making your investment decisions. ETF Investing Strategies teaches you how to judge liquidity, spreads and premiums, so every trade you place is made at a fair price.

Cutting Costs While You Hold

Buy, Hold and Trade Less

Every trade adds spread costs and, in a taxable account, may create a tax bill. A long-term plan you can stick to without constant buying and selling is one of the cheapest investment strategies there is.

Automate Regular Investing

Setting up regular monthly or fortnightly contributions, often called dollar-cost averaging, removes the temptation to time the market and keeps your investing on track. With commission-free trading, automatic investments cost little or nothing to make.

Reinvest Dividends Automatically

Most brokers offer free dividend reinvestment, often buying fractional shares, so every dividend goes back to work without trading costs or cash sitting idle. Reinvested dividends are still taxable in a taxable account, but each one adds to your cost basis and reduces your taxable gain when you sell.

Rebalance With New Money Instead of Selling

When your portfolio drifts away from your target mix, you can direct new contributions to the parts that have fallen behind rather than selling what has grown. That avoids spreads and, in a taxable account, capital gains. FRC’s guide on how to rebalance an ETF portfolio covers the options.

Don’t Hold Leveraged, Inverse or Futures-Based Funds Long Term

Leveraged and inverse ETFs reset their exposure every day, which can make returns drift far from what you expect over longer periods. Futures-based commodity funds face roll costs: when later contracts cost more, a condition called contango, the fund repeatedly sells low and buys high. Add their higher fees, and these funds are expensive to hold for long.

Cutting Costs at Tax Time

Use Asset Location

Hold tax-inefficient funds, such as bond, REIT and high-income ETFs, in tax-advantaged accounts like IRAs, 401(k)s and Roth IRAs, and tax-efficient stock ETFs in taxable accounts. The in-kind creation and redemption process lets most stock ETFs avoid distributing capital gains, which makes them well suited to taxable accounts. FRC’s guide on where to hold ETFs explains how.

Get the Timing Right

Gains on ETFs held for one year or less are taxed at ordinary income rates of up to 37%, while gains on those held for more than a year are taxed at 0%, 15% or 20%. Dividends only get the lower qualified rates if you have held the shares for more than 60 days in the 121-day window around the ex-dividend date. And funds expecting to pay a capital gains distribution usually publish estimates in the autumn and pay in December, so buying just before the record date means paying tax on a gain you never benefited from.

Harvest Losses, and Gains, Carefully

Selling an ETF at a loss can offset gains and up to $3,000 a year of ordinary income, but buying the same or a substantially identical fund within 30 days before or after the sale triggers the wash sale rule and disallows the loss. If your taxable income falls in the 0% long-term capital gains bracket, you can also sell and rebuy to lock in gains tax-free and raise your cost basis. Using specific identification when you sell, and claiming a foreign tax credit for any foreign withholding tax your international funds paid, can cut your bill further.

FRC’s guide to how ETFs are taxed in the United States covers every rule in detail.

The question isn’t whether financial education costs money. It’s what a lack of it could cost you. Advanced ETF Investing goes deeper into tax-aware portfolio management, from asset location to loss harvesting.

Cutting the Cost of Help

Know Exactly What You Pay for Advice, and Negotiate It

Traditional advisers often charge around 1% of the assets they manage, and some charge more. A 1% fee on top of a 0.10% ETF means total costs of 1.10% a year, more than ten times the cost of the fund alone. Robo-advisers, which automate rebalancing and sometimes tax-loss harvesting, often charge around 0.25% a year or less.

Good advice can be worth far more than it costs, especially for complex finances, retirement planning or keeping you disciplined in a falling market. But you should always know the total you pay. Ask for an itemised, written list of every charge, watch for wrap fees, performance fees and acquired fund fees layered on top of the funds’ own costs, and ask whether a lower rate is available as your portfolio grows.

How Much Can These Savings Add Up To?

The effect of cutting costs grows with time. Investing $500 a month for 30 years at 7% a year before costs, a total of $180,000, grows to about $606,387 with costs of 0.03% a year, but about $502,258 with costs of 1% a year. That gap of more than $104,000 comes from costs that look like less than one percentage point.

Trading and tax savings add to that. Avoiding a few wide spreads, one short-term gain or one badly timed capital gains distribution each year may not feel like much, but every dollar saved stays invested and compounds. FRC’s guide to how compound interest builds wealth in ETFs shows how that growth builds over time.

The figures are illustrative and assume a steady return, which real markets never deliver. But the principle holds: the less you pay, the more of the market’s return reaches you.

How to Audit Your ETF Costs

Start with a list of every fund you own, the account it sits in and the amount invested. For each one, note the expense ratio from the fund’s fact sheet, then multiply it by the amount you hold to see the annual cost in dollars.

Next, look up each fund’s tracking difference over the last few years and its typical bid-ask spread. Check whether any two funds track similar indexes or hold many of the same companies, because that is where overlapping fees hide.

Then turn to your accounts. Note any platform, account, currency or adviser fees, and check whether each fund sits in the right type of account for its tax treatment. Your Form 1099-DIV and Form 1099-B from the last tax year show how much income and how many gains each fund actually generated.

Finally, add everything up as a percentage of your total portfolio. That single number, your all-in cost, is the one to bring down year after year.

Which Costs Matter Most for You

The costs that matter most depend on how you invest. A long-term investor who buys a few broad funds and rarely trades will find that expense ratios and tax do most of the damage, so those are the first places to look.

A frequent trader feels spreads, premiums and short-term tax rates far more. For them, choosing liquid funds, using limit orders and trading less can save more than any change in fund fees.

An income investor is hit hardest by fees taken from yield and by income taxed at ordinary rates. Low-cost funds and careful asset location usually make the biggest difference. Anyone using an adviser should start with the advisory fee, because it is often the largest single cost in the portfolio.

Where to Start

You do not need to apply all 25 at once. Start with the ones that make the biggest difference: the expense ratios of the funds you hold, where each fund sits across your accounts, how often you trade and what you pay for advice.

Then work through the rest over time. A once-a-year review of your costs, your accounts and your tax position will catch most of the leaks before they compound.

Common Questions

What is the cheapest way to invest in ETFs? Buy low-cost, broad index ETFs through a commission-free broker, invest automatically, use limit orders, trade rarely and hold tax-inefficient funds in tax-advantaged accounts. Those habits keep fund fees, trading costs and taxes as low as possible.

How can I reduce ETF fees? Compare the expense ratios of funds tracking the same index, check tracking difference over several years, avoid overlapping funds and only pay for active management that has delivered after fees.

Do ETF trading costs matter for long-term investors? Less than for frequent traders, but they still count. Every trade costs the bid-ask spread, and in a taxable account selling can create a tax bill, so trading less is one of the simplest savings.

What is the best time of day to buy ETFs? Usually the middle of the trading day, avoiding the first and last 30 minutes when spreads are often wider. For international ETFs, trade while the underlying foreign markets are open.

How do I avoid paying tax on ETFs? You cannot avoid it entirely in a taxable account, but you can reduce it. Use tax-advantaged accounts, hold for more than a year, meet the qualified dividend holding period, harvest losses and check year-end distribution estimates.

Does a lower expense ratio always mean a better ETF? No. A lower fee is a clear advantage between funds tracking the same index, but a cheap fund that holds the wrong assets for your goals is still the wrong fund. Decide what you want to own first, then find the cheapest well-run way to own it.

How often should I review my ETF costs? Once a year is enough for most investors. A yearly review catches new fees, expiring waivers, drifting allocations and tax opportunities before they compound into larger costs.

Is it worth paying a financial adviser to manage ETFs? It can be, especially if you need help with planning, tax or discipline. Make sure you know the total cost, including the adviser’s fee and the funds’ fees, and what you receive for it.

Your Portfolio Deserves an Educated Investor

Most of the costs on this list are invisible unless you know where to look. That is exactly why they persist: investors who never check them keep paying them, year after year.

Don’t pay the market to teach you expensive lessons. FRC’s three progressive ETF programmes take you from understanding what an ETF costs, through trading and tax-aware investing, to managing a portfolio built for long-term value. FRC’s programmes and memberships are open to everyone, whether you are investing $500 or $500,000.

Invest in understanding the market before investing in the market itself. Every cost you cut is a return you keep.