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 and its affiliates provide advisors, broker-dealers, family offices, hedge fund and ’40 Act fund managers, registered investment advisor firms and wealth managers with a broad suite of global financial business solutions. Many of the world’s most sophisticated and successful financial services firms rely on Pershing for clearing and custody, investment and retirement solutions, technology, enterprise data management, trading services, prime brokerage and business consulting. Pershing helps clients improve profitability and drive growth, create capacity and efficiency, attract and retain talent, and manage risk and regulation. With a network of 23 offices worldwide, Pershing provides business-to-business solutions to clients representing more than 6 million investor accounts globally. Pershing LLC (member FINRA, NYSE, SIPC) is a BNY Mellon company. Additional information is available on pershing.com, or follow us on 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 management and investment services in 35 countries and more than 100 markets. As of June 30, 2017, BNY Mellon had $31.1 trillion in assets under custody and/or administration, and $1.8 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.