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Before investing in an ETF, check out the price

by , 22 September 2014

Exchange traded funds (ETFs) are a great way to gain exposure to the market. By passively tracking market indexes and commodities, you can benefit from their performance.

But before you jump in, make sure you pay attention to the price. If you don't, you could end up paying more than you bargained for.

So let's take a closer look at what aspects of an ETF's price you need to focus on…

Look at an ETF’s TER

The total expense ratio (TER) is the ongoing charge for an ETF. It’s a way of measuring the annual costs incurred by the fund.

You’ll be able to find it on the fund’s providers’ documentation. Or you can ask your stockbroker.

The TER includes charges such as the annual management fee and administration costs. But it usually doesn’t include trading costs and any taxes due.

Generally speaking, the lower the TER, the better.

How much are you paying your stockbroker to invest in ETFs?

Investing in ETFs is just like buying shares in the eyes of your stockbroker. So buying ETFs comes with the same charges that buying shares does.

Stockbrokers usually charge a flat fee per transaction, plus a sliding scale fee. You’ll also have to pay these when you sell the ETF, Phil Oakley in Money Week explains.

If you’re investing small amounts into ETFs, these fees can be quite hefty in comparison.

The bid offer spread of an ETF

The bid offer spread is the difference between the buy (offer) price and the sell (bid) price.

On larger ETFs, the spreads are usually quite small. But if it’s a smaller fund, the spread can be quite significant.

To minimise paying large spreads, it’s best to avoid buying and selling ETFs when the market’s just opening or closing. There can be fewer buyer and sellers around.

If the spread seems large, you can always try again tomorrow.

So there you have it, why you should check out the price before investing in an ETF.

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Before investing in an ETF, check out the price
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