{"id":18780,"date":"2021-07-30T23:19:43","date_gmt":"2021-07-30T23:19:43","guid":{"rendered":"https:\/\/analystprep.com\/study-notes\/?p=18780"},"modified":"2026-01-19T08:47:08","modified_gmt":"2026-01-19T08:47:08","slug":"describe-the-costs-of-owning-an-etf","status":"publish","type":"post","link":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/describe-the-costs-of-owning-an-etf\/","title":{"rendered":"Cost of Owning an ETF"},"content":{"rendered":"<script type=\"application\/ld+json\">\r\n{\r\n  \"@context\": \"https:\/\/schema.org\",\r\n  \"@type\": \"QAPage\",\r\n  \"mainEntity\": {\r\n    \"@type\": \"Question\",\r\n    \"name\": \"What is Jayson Smith\u2019s round-trip trading cost?\",\r\n    \"text\": \"Jayson Smith pays a commission of $8 on a $22,000 trade and incurs 0.14% on the bid\u2013ask spread. What is his round-trip trading cost closest to?\",\r\n    \"answerCount\": 3,\r\n    \"acceptedAnswer\": {\r\n      \"@type\": \"Answer\",\r\n      \"text\": \"0.212%.\",\r\n      \"dateCreated\": \"2026-01-19\"\r\n    },\r\n    \"suggestedAnswer\": [\r\n      {\r\n        \"@type\": \"Answer\",\r\n        \"text\": \"0.036%.\"\r\n      },\r\n      {\r\n        \"@type\": \"Answer\",\r\n        \"text\": \"0.248%.\"\r\n      }\r\n    ]\r\n  }\r\n}\r\n<\/script>\r\n\r\n\r\n<p><iframe loading=\"lazy\" src=\"\/\/www.youtube.com\/embed\/QyOCKuOJQJs\" width=\"611\" height=\"343\" allowfullscreen=\"allowfullscreen\"><\/iframe><\/p>\r\n<p>Some cost factors must be considered when trading in ETFs. They can either be <strong>implicit costs<\/strong>, e.g., tracking error, bid-ask spread, premium or discount to NAV, portfolio turnover, and secured lending; or <strong>explicit costs<\/strong>, e.g., management fees, commissions, and taxable profits or losses to traders.<\/p>\r\n<p>From the investor&#8217;s perspective, these cost factors can either be positive or negative. Positive costs may include premiums and taxable profits, whereas the rest are negative costs.<\/p>\r\n<h2>Trading Costs versus Management Fees<\/h2>\r\n<p>We will illustrate the effect of management and trading costs by calculating the round-trip and holding period costs.<\/p>\r\n<h3>1. Round-trip Cost<\/h3>\r\n<p>Suppose an investor pays a commission of $4 on a $10,000 trade. Additionally, he pays a 0.12% bid-ask spread. The investor&#8217;s round-trip trading cost is <em>closest to<\/em>:<\/p>\r\n<h4>Solution<\/h4>\r\n<p>$$ \\begin{align*} \\text{Round-trip trading cost } (\\%) &amp; = \\left(\\text{One-way commission } \\%\\times2\\right) \\\\ &amp; +\\left(\\frac{1}{2}\\text{Bid}-\\text{ask spread } \\%\\times2\\right) \\\\ \\text{One-way commission} &amp; = \\frac{$4}{$10,000}=0.04\\% \\\\ &amp; =\\left(0.04\\%\\times2\\right)+\\left(\\frac{1}{2}\\times0.12\\%\\times2\\right) \\\\ &amp; =0.20\\% \\end{align*} $$<\/p>\r\n<h3>2. Holding Cost<\/h3>\r\n<p>Suppose an investor pays a commission of $4 on a $10,000 trade. Additionally, he pays a 0.12% bid-ask spread. The 4-month, 12-month, and 2-year holding period of the investor with an annual fee of 0.12% is <em>closest to<\/em>:<\/p>\r\n<h4>Solution<\/h4>\r\n<p>$$ \\begin{align*} \\text{Holding period cost } (\\%) &amp; = \\text{Round-trip trade cost } (\\%) \\\\ &amp; + \\text{Management fee for period } (\\%). \\end{align*} $$<\/p>\r\n<p>The holding period costs for:<\/p>\r\n<p>$$ \\begin{align*} \\text{4-month holding period cost }(\\%) &amp; = 0.20\\%+\\left(\\frac{4}{12}\\times0.12\\%\\right)=0.24\\% \\\\ \\text{12-month holding period cost } (\\%) &amp; = 0.20\\%+\\left(\\frac{12}{12}\\times0.12\\%\\right)=0.32\\% \\\\ \\text{2-year holding period cost }(\\%) &amp; = 0.20\\%+\\left(\\frac{24}{12}\\times0.12\\%\\right)=0.44\\% \\end{align*} $$<\/p>\r\n<p>The trading costs and the management costs can be obtained, as shown in the following table.<\/p>\r\n<p>$$ \\begin{array}{c|c|c|c} \\textbf{Holding Period} &amp; \\textbf{4-month} &amp; \\textbf{12-month} &amp; \\textbf{2-year} \\\\ \\hline \\text{Commission} &amp; 0.08\\% &amp; 0.08\\% &amp; 0.08\\% \\\\ \\hline \\text{Bid-Ask Spread} &amp; 0.12\\% &amp; 0.12\\% &amp; 0.12\\% \\\\ \\hline \\text{Management Fee} &amp; 0.04\\% &amp; 0.12\\% &amp; 0.24\\% \\\\ \\hline \\text{Total} &amp; 0.24\\% &amp; 0.32\\% &amp; 0.44\\% \\end{array} $$<\/p>\r\n<p>Therefore,<\/p>\r\n<p><strong>For the 4-month holding period<\/strong>:<\/p>\r\n<p>$$ \\begin{align*} \\text{Trading cost } \\% \\text{ of the total} &amp; = \\frac{0.20\\%}{0.24\\%}=0.83\\% \\\\ \\text{Management fees } \\% \\text{ of the total} &amp; = \\frac{0.04\\%}{0.24\\%}=0.17\\% \\end{align*} $$<\/p>\r\n<p><strong>For the 12-month holding period<\/strong>:<\/p>\r\n<p>$$ \\begin{align*} \\text{Trading cost } \\% \\text{ of the total} &amp; = \\frac{0.20\\%}{0.32\\%}=0.625\\% \\\\ \\text{Management fees } \\% \\text{ of the total} &amp; = \\frac{0.12\\%}{0.32\\%}=0.375\\% \\end{align*} $$<\/p>\r\n<p><strong>For the 2-year holding period<\/strong>:<\/p>\r\n<p>$$ \\begin{align*} \\text{Trading cost } \\% \\text{ of the total} &amp; = \\frac{0.20\\%}{0.44\\%}=0.45\\% \\\\ \\text{Management fees } \\% \\text{ of the total} &amp; = \\frac{0.24\\%}{0.44\\%}=0.55\\% \\end{align*} $$<\/p>\r\n<p>From the above calculations, note that for holding periods of 3 and 12 months, trading costs represent the largest proportion of annual holding costs (0.83% and 0.625%, respectively). Moreover, for a three-year holding period, management fees represent a much larger proportion of holding costs (0.55%), excluding the compounding effect.<\/p>\r\n<blockquote>\r\n<h2>Question<\/h2>\r\n<p>Jayson Smith is an investor who pays a commission of $8 on a $22,000 trade. He also spends 0.14% on the bid-ask spread. Smith&#8217;s round-trip trading cost is <em>closest to<\/em>:<\/p>\r\n<ol type=\"A\">\r\n\t<li>0.036%.<\/li>\r\n\t<li>0.248%.<\/li>\r\n\t<li>0.212%.<\/li>\r\n<\/ol>\r\n<h4><strong>Solution<\/strong><\/h4>\r\n<p><strong>The correct answer is C.<\/strong><\/p>\r\n<p>$$ \\begin{align*} \\text{Round-trip trading cost } (\\%) &amp; = \\left(\\text{One-way commission } \\%\\times2\\right) \\\\ &amp; +\\left(\\frac{1}{2}\\text{Bid}-\\text{ask spread } \\%\\times2\\right) \\\\ \\text{One-way commission} &amp; = \\frac{$8}{$22,000}=0.036\\% \\\\ &amp; =\\left(0.036\\%\\times2\\right)+\\left(\\frac{1}{2}\\times0.14\\%\\times2\\right) \\\\ &amp; =0.212\\% \u2003\\end{align*} $$<\/p>\r\n<\/blockquote>\r\n<p>Reading 39: Exchange Traded-Funds, Mechanics and Applications<\/p>\r\n<p><em>LOS 39 (f) Describe the costs of owning an ETF.<\/em><\/p>\r\n","protected":false},"excerpt":{"rendered":"<p>Some cost factors must be considered when trading in ETFs. They can either be implicit costs, e.g., tracking error, bid-ask spread, premium or discount to NAV, portfolio turnover, and secured lending; or explicit costs, e.g., management fees, commissions, and taxable&#8230;<\/p>\n","protected":false},"author":4,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[102,473],"tags":[216,564],"class_list":["post-18780","post","type-post","status-publish","format-standard","hentry","category-cfa-level-2","category-portfolio-management","tag-cfa-level-2","tag-portfolio-management","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.9 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Cost of Owning an ETF - CFA, FRM, and Actuarial Exams Study Notes<\/title>\n<meta name=\"description\" content=\"Learn the costs associated with trading ETFs, and how to calculate round-trip and holding period costs to make informed investment decisions.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/describe-the-costs-of-owning-an-etf\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Cost of Owning an ETF - 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