ETF Expense Ratios: Are All Costs Borne by the Investor? An Empirical Analysis Using the Open-End Mutual Fund Model

Abstract

On average, ETFs have lower annual expense ratios than open-end mutual funds due to a few functional differences. Both have fixed and variable costs which are incorporated in the expense ratio, and the assumption is that all costs are borne by the investor. We apply previous models for open-end funds to ETFs and find mixed results. Like open-end funds, larger and older ETFs tend to have lower expense ratios. Unlike open-end funds, ETFs that participate in no-transaction fee programs do not have higher expense ratios. Our results suggest that, among ETFs, all costs may not be borne by the investor.