Robinhood offers commission fee trading, meaning you are not charged a transaction fee when you buy or sell stock or ETF shares.
However, most ETFs have management expense ratios deducted daily from the fund's net asset value (NAV), meaning you are still paying fees in other ways on Robinhood.
As an individual investor, you will not see the expense ratio fees on your statements since they are simply deducted from the value of the overall fund.
This article will discuss everything you must know about how Robinhood ETF fees affect your investment portfolio.
What is an ETF?
An exchange-traded fund (ETF) is a stock fund that trades just like regular companies on the stock market. ETFs are available on most brokerages and give investors exposure to a basket of companies.
For example, most employee 401k’s are invested in funds like ETFs that invest in the overall stock market.
The benefit of investing in ETFs is that investors don’t have to manage a portfolio of individual companies and can use them as passive investments.
A fund manager takes care of the purchase and sale of stocks within the fund so that the investors don’t have to worry about picking stocks and managing risk.
What Fees do ETFs Come With?
The expense ratio is the primary fee you must understand when it comes to ETF investing. The expense ratio is the combination of a fund’s management fee, distribution fee, service fee, and other administrative fees.
For passively managed index ETFs, the expense ratios are lower since there is less active management required from the fund managers.
Some brokers may charge an additional commission each time you buy and sell a stock or ETF. However, since Robinhood started offering commission-free trading, most brokers have followed suit to remain competitive.
How do ETF Fees Work on Robinhood?
Robinhood ETF fees work the same on Robinhood as on every other brokerage. You pay ETF fees to the fund management company, not the brokerage where you buy them.
Therefore, the ETF fees depend on which ETF you invest in rather than which broker you use. Most brokers offer commission-free trading but double-check just in case to ensure you are investing as efficiently as possible.
Benefits of Buying and Holding ETFs on Robinhood
One of the fantastic benefits Robinhood offers to its clients is the option for fractional shares. With fractional share investing, you can buy partial shares of an ETF for as little as $1.
Therefore, investors who use a dollar-cost average (DCA) strategy can do so more effectively on a brokerage like Robinhood that offers fractional shares. In addition, Robinhood offers an automatic investment feature that automatically deposits money and buys shares of stock as often as once per day.
For example, let’s say an investor plans to buy $300 worth of ETFs each month. Instead of investing $300 on the first of the month, they can invest $10 daily to spread their average price more evenly.
Mutual Funds vs. ETF Fees
ETFs can keep their fees lower than mutual funds because of how they are structured. Since ETFs are bought and sold on the open market like regular stocks, these transactions do not affect the fund.
On the other hand, when investors sell their shares in a mutual fund, they are cashed out from the fund directly.
When an investor decides to sell shares of a mutual fund, the fund manager must sell some assets to rebalance the fund.
More fees occur since mutual fund managers must rebalance more frequently than ETF managers.
The Impact of ETF Fees (Expense Ratios)
While passively managed ETF fees may seem small enough to ignore, their long-term effect can be substantial. ETF fees compound just like your portfolio returns, so minimizing the impact of this negative compounding is crucial.
As you can see from the image above, expense ratios make a significant difference in the long run.
With a $100,000 portfolio, the 20-year difference is nearly $30,000. Therefore, if you have a larger portfolio, the expense ratio can be a six-figure plus expense if you don’t research funds with the lowest fees.
Which ETFs Have the Lowest Fees?
To help you research ETFs, I created a page with my favorite ETFs and their expense ratios.
If you are looking to build a portfolio of ETFs, this is an excellent resource to compare and contrast the many ETF options available.
Robinhood ETF Fees | Bottom Line
While Robinhood boasts its commission-free trading, you must still account for fees charged by the ETF managers.
These ETF fees are relevant regardless of which broker you invest with since they are deducted from the ETF’s value and not directly charged to investors.
ETF fees can range quite a bit, so it is essential that you research and find the ETF with the lowest expense ratio possible.
Vanguard is known for providing some of the cheapest mutual funds and ETFs, so ETFs like VOO and VTI are the most popular amongst retail investors.
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Want to keep learning? Check out some of my other blog posts:
Was Cash King During The Great Depression?
Shorting ETFs: ETFs That Thrive In Market Crashes
How Do Higher Interest Rates Impact The Stock Market?
Smart Investments During A Stock Market Crash
As Always: Buy things that pay you to own them.
-Josh
Blog Post: #072
