ETFs are investment instruments that are listed on stock exchanges that offer investors to get exposure to a variety of asset classes. ETFs can be of different types tracking a particular asset class like Index, Commodity, and a particular sector. There are some changes in an ETF that include the Expense ratio and some other fixed charges charged by brokers, SEBI, etc.
ETF (Exchange Traded Funds)
ETFs or Exchange Traded Funds are funds that can consist of a broad category of asset classes under them. ETFs are primarily a pool of funds that track a particular index, commodity, or specific sector and fluctuates in price with the change in the underlying asset.
ETFs are listed on Stock exchanges (NSE & BSE) from where an individual can buy and sell them at their desired price and quantity. The buying process of an ETF is similar to a Stock, where an individual places an order, and the shares get credited into their Demat accounts, similarly, ETFs also get credited to one Demat account and are stored in the investor’s Demat account, unlike Mutual Funds which is held by the Asset Management company.
Charges in an ETF
As ETFs are listed on stock exchanges, the charges to buy and sell them are different than that of Mutual Funds. There are 2 types of charges while buying an ETF.
- Internal charges- This is paid to the ETF managing company
- External charges- This is paid to the exchanges, government, brokers, etc.
Let’s understand both of them in detail.
1. Internal Charges
In an ETF there is only one charge that an investor has to bear which is the Expense charges which including the managing charges, asset allocation, and buying and selling charges. This is charged in terms of percentage of the amount invested as “Expense Ratio”. This ranges from 0.01% to as high as 2-3% depending on the nature of the ETF. An actively managed ETF will have a higher expense ratio compared to a passively managed fund or a fund that tracks an Index.
2. External charges or Additional charges
Apart from the expense ratio, an investor has to pay some fees while buying and selling the ETF on the stock exchange which is charged by the exchanges, regulators, and the broker’s as-
- Brokerage charges
- Transaction charges
- Securities Transaction Tax
- Stamp Duty
- DP charges (Depository charges)
- GST (Goods and Services Tax) on brokerage.
All the above charges are applied while buying an ETF from the Stock exchange. Brokers charge a brokerage for buying & selling securities, some discount brokers don’t charge any brokerage for Delivery based orders but others charge in terms of percentage of the total order value. The additional charges like Stamp duty, Transaction charges & STT (Securities transaction tax) are charged on a fixed percentage basis by every broker.
All these charges are very small in nature but do turn out to be substantial when transacting in huge volume. ETFs are treated as equity or stocks hence all these charges are applied while buying and selling an ETF.