When I buy an ETF, the ETF issuer wants a certain management fee (expense ratio). How is this usually paid?

I've read that this might be deducted from dividends - is this the case? How does it work for ETFs where no dividends are applicable (for example, physically backed commodity ETFs)?

And specifically, what happens if you short an ETF? Who pays the fees and how does that influence the profit of the short seller?

  • 2
    $\begingroup$ regarding your first question: quant.stackexchange.com/questions/2247/… $\endgroup$ – LazyCat Apr 19 '16 at 19:29
  • $\begingroup$ In principle by being long an S&P500 ETF with a small fee and short an S&P500 ETF with a large fee you could profit from the underperformance of the latter due to fees. But you would have some transactions costs (incl. bid-ask spread) that I suspect make it not worthwhile. $\endgroup$ – noob2 Apr 20 '16 at 18:44

To answer your second question, the expense ratio fees are reflected in the net asset value of the ETF. Shorting also incurs a borrow cost.

  • $\begingroup$ This answer is correct. The daily NAV is comprised of assets and liabilities and among the liabilities is the accrued fees to date. So the fees are being taken out little by little every day. (It doesn't matter what the assets are, gold bullion or whatever, dividend paying or not). $\endgroup$ – Alex C Nov 8 '17 at 3:34
  • $\begingroup$ @AlexC Actually my understanding was: we don't know when the fee's are deducted, it could be daily, it could be quarterly, it could be on dividends. Is this still the case? $\endgroup$ – pyCthon Nov 8 '17 at 12:14
  • $\begingroup$ Sorry, I overstated the case. It works like this (daily accrual) in one case I know, it may not be true generally. $\endgroup$ – Alex C Nov 8 '17 at 23:28

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