The expense ratio is only part of what an ETF costs. The spread, commissions, fee layers and, for an ETN, the gap to its published value can matter as much.
What you pay, and what you hold
Every listed security has two prices: the bid, the most a buyer will pay, and the ask, the least a seller will take. The gap is the spread. Buying at the ask and selling at the bid gives it up on every share, so the SEC calls it a hidden cost. More liquid ETFs with higher volume typically have tighter spreads. Investors may also pay brokerage commissions, and reinvesting an ETF’s distributions can be more complicated than with a mutual fund and may cost commissions too.
Many ETFs meet creations and redemptions by exchanging securities in kind rather than selling them for cash, so they typically distribute fewer capital gains than similar mutual funds; investors in a taxable account may still owe tax on the gain distributions they do make. Most ETFs post their holdings on their websites daily. ETFs registered under the Investment Company Act have its protections, such as limits on illiquid holdings and on borrowing. Exchange-traded commodity funds that are not registered under the Act, and ETNs, do not.
The ETF wrapper does not make a fund diversified. Some ETFs hold few investments or track a single stock; a leveraged single-stock ETF magnifies that stock’s daily moves and gives no diversification. A target date fund that holds other funds can carry two layers of fees: its own and those of the funds inside it.
An ETN has no portfolio. Each day its issuer publishes a value representing what it would owe holders, and the market price can sit above or below it, especially when the issuer has stopped issuing new notes, so buyers compare the two. Many ETNs carry stated maturities decades away but are generally traded rather than held. Some trade heavily and some go days without a trade, so a holder who needs cash may not sell quickly at a fair price.
Exam terms
- Bid-ask spread
- The gap between the best bid and the best ask; a trading cost paid in the market.
- In-kind exchange
- Moving securities rather than cash in and out of an ETF, which leaves fewer gains to distribute.
- Indicative value
- The value an ETN issuer publishes each day as what it would owe holders.
- Single-stock ETF
- An ETF seeking a multiple of one stock’s daily return; it does not diversify.
- Double layer of fees
- A fund’s own fees plus those of the funds it holds.
Costs and checks for ETFs and ETNs
| ETF | ETN | |
|---|---|---|
| Trading cost | Spread plus any commission | Spread plus any commission |
| Check price against | Net asset value | Issuer’s indicative value |
| Tax | Fewer gain payouts, from in-kind exchanges | Treatment varies by note |
| Thin trading | Wider spreads | Hard to sell at a fair price |
Try it: Two ETFs track the same index and have the same expense ratio. On paper, list every cost you would pay to buy one and sell it a month later, and mark the one cost that can differ between the two funds. Then write the one figure you would check before buying an ETN, and why.
The closest contrast
Expense ratio: inside the fund.
Spread: in the market.
This decides cost questions. The expense ratio is not the whole cost of an ETF: buying at the ask and later selling at the bid gives up the spread once on each share, on top of the fund’s expenses.
Worked example
Wolfram Eskildsen buys 500 shares of a thinly traded ETF at the ask of $25.40 while the bid is $25.10, and sells a few weeks later at the bid.
- The spread is $25.40 − $25.10 = $0.30 a share.
- If the quotes have not moved when he sells, he gives up $0.30 × 500 = $150 to the spread, before any commission.
- Had he bought an ETN instead, he would also check its price against the issuer’s indicative value before buying.
Check yourself
Try a question, then read the explanation to review the rule.
Opening your study record…
Same rule, new context
Opening your study record…
Summary
- An ETF costs its expenses plus the bid-ask spread and any commissions; liquid ETFs usually have tighter spreads.
- Many ETFs exchange securities in kind, so they distribute fewer capital gains; distributions made are taxed normally.
- Check what an ETF holds: some track one stock, and funds that hold other funds can carry two layers of fees.
- Among exchange-traded products, only those registered under the Investment Company Act carry its limits on illiquid holdings and borrowing.
- For an ETN, compare price with indicative value, expect to trade rather than hold to maturity, and check liquidity.
Related practice
- ETF trading costs, taxes and what the fund holdsPractice this
- ETN trading: indicative value, maturity and liquidityPractice this
- Exchange-traded product structuresPractice this
Sources
- SIE Examination Content Outline (2025) · FINRA · checked 2026-10-12
- Updated Investor Bulletin: Exchange-Traded Funds (ETFs) (SEC Office of Investor Education and Advocacy, February 23, 2023) · Investor.gov · checked 2026-10-09
- Exchange-Traded Funds (ETFs) — diversification, tax advantage, reinvestment, fees and target date funds (SEC Office of Investor Education and Advocacy) · Investor.gov · checked 2026-10-09
- Single-stock ETFs (SEC Office of Investor Education and Advocacy glossary) · Investor.gov · checked 2026-10-09
- Investor Bulletin: Exchange Traded Notes (ETNs) — maturities, indicative value, premiums and liquidity (SEC Office of Investor Education and Advocacy, December 1, 2015) · Investor.gov · checked 2026-10-09
- Bid Price/Ask Price (SEC Office of Investor Education and Advocacy glossary) · Investor.gov · checked 2026-09-04
- Characteristics of Mutual Funds and Exchange-Traded Funds — Investor Bulletin (SEC Office of Investor Education and Advocacy) · Investor.gov · checked 2026-09-05
- Investor Bulletin: Exchange Traded Notes (ETNs) (December 1, 2015) · Investor.gov · checked 2026-09-04