How much do they cost?
Exchange traded funds trade just like a normal share. As such, you buy them in much the same way as you would shares in Shell or HSBC. That means using a broker – either an online investment platform (see our guide here - https://www.boringmoney.co.uk/learn/investing-guides/product-guides/online-investment-platforms/) or through a conventional stockbroker.
The broker will charge a commission on buying and selling. You will also pay stamp duty of 0.5% when you buy. There is also an annual management charge for the ETF. This is usually relatively small, particularly for large, popular trusts based on well-recognised indices. Niche ETFs may charge a little more. There will also be something called a ‘bid/offer spread’ – a bit like a currency exchange, there is a gap between the price the broker is willing to sell and the price they buy.
In practice, the price charged by the broker can vary considerably. If you’re making regular payments into an ETF, these costs can mount up so it’s worth paying attention.
(i) Why is the market price sometimes different from the net asset value (NAV) of an ETF
This a slight complexity of both ETFs and investment trusts. They trade on an exchange, therefore the price is determined by supply and demand (the ratio of buyers to sellers). In theory, this should mirror the price of the underlying assets (its ‘net asset value’), but this doesn’t happen all the time. If an ETF is popular, it may trade on premium to its net asset value (NAV); if it’s unpopular it may trade on a discount.
Usually, this is more of a problem with niche ETFs. It doesn’t tend to happen with the large, popular ETFs, where there are lots of buyers and sellers and the price reflects the value of the underlying assets.