BNY Mellon's Pershing’s Report Uncovers What Advisors Need to Be Aware of When Assessing the True Cost of ETF Ownership

October 26, 2015

Advisors are familiar with the benefits ETFs offer, but more complex issues lie just below the surface

JERSEY CITY, N.J. - Many of the well-known benefits of exchange traded funds (ETFs), including diversification, lower costs, flexibility and tax efficiency, tend to overshadow the complex features and pricing of these products, according to a whitepaper released today by Pershing LLC, a BNY Mellon company. The report, What Lies Beneath: Understanding the Structure and Costs in ETFs, outlines underlying components that impact ETF pricing, and identifies areas that advisors should keep in mind when evaluating the true cost of ETF ownership for their clients.

“As ETFs continue to grow in popularity, it’s important for advisors to be as well informed as possible about the apparent and underlying factors that influence the cost of their ownership,” said Justin Fay, vice president and solutions manager for alternative investments and ETFs at Pershing. “Taking these factors into account will help advisors make a more accurate ‘apples-to-apples’ comparison, between ETFs, as well as between other investment options—such as low-cost mutual funds.”

With increased inflows and new products entering the market each day, even seasoned advisors may overlook complex key issues beyond the benefits of ETFs. The report explores factors to consider when evaluating the true cost of ETFs, including:

  • Look Beyond Expense Ratios – Advisors should also consider costs that are not included in the expense ratio that complex types of ETFs may accrue (i.e. deferred tax liabilities).
  • Understand Components of the Bid-Ask Spread – Investors and advisors should examine the underlying components that can significantly influence the value of the bid-ask spread and understand the implications it can have on the cost of ETFs.
  • Monitor Tracking Errors – Advisors should not overlook the tracking error—which is the risk that an ETF’s price might not match the fund’s benchmark.
  • Evaluate Spreads on Commission-free ETFs – Advisors should investigate whether the spread on no-transaction fee funds are wider than that of similar ETFs with transaction fees.

To obtain a copy of Pershing’s whitepaper, What Lies Beneath: Understanding the Structure and Costs in ETFs please visit www.pershing.com/ourthinking.

About BNY Mellon's Pershing

BNY Mellon’s Pershing is a leading provider of clearing and custody services. We are uniquely positioned to help complex financial services firms transform their businesses, drive growth, maximize efficiency, and manage risk and regulation.

Wealth management and institutional firms outsource to us for trading and settlement services, investment solutions, bank and brokerage custody, middle and back office support, data insights, and business consulting.

Pershing brings together high-touch service, an open digital platform and the BNY Mellon enterprise to deliver a differentiated experience for every client.

Pershing LLC (member FINRA, NYSE, SIPC) is a BNY Mellon company. With offices around the world, Pershing has over $2 trillion in assets and millions of investor accounts. Pershing affiliates include Albridge Solutions, Inc. and Lockwood Advisors, Inc., an investment adviser registered in the United States under the Investment Advisers Act of 1940. Additional information is available on pershing.com, or follow us on LinkedIn or Twitter @Pershing.

About BNY Mellon

BNY Mellon is a global investments company dedicated to helping its clients manage and service their financial assets throughout the investment lifecycle. Whether providing financial services for institutions, corporations or individual investors, BNY Mellon delivers informed investment and wealth management and investment services in 35 countries. As of June 30, 2021, BNY Mellon had $45.0 trillion in assets under custody and/or administration, and $2.3 trillion in assets under management. BNY Mellon can act as a single point of contact for clients looking to create, trade, hold, manage, service, distribute or restructure investments. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation (NYSE: BK).Additional information is available on www.bnymellon.com. Follow us on Twitter @BNYMellon or visit our newsroom at www.bnymellon.com/newsroom for the latest company news.

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