ETF costs explained: what do you actually pay when you buy and sell?

Exchange-traded funds (ETFs) typically appear attractive cost-wise for retail investors. Their headline fees have fallen steadily for two decades, and a total expense ratio (TER) below 0.10% is now routine for the largest index trackers. That visible number, typically printed on all factsheets, has become the default way investors compare products.

Yet the expense ratio measures only the cost of holding an ETF, not the cost of trading one. Every purchase and sale carries execution costs — the bid-ask spread, any premium or discount to fair value, and the market impact of the order itself — paid at the moment of the trade. For investors who trade frequently, or in size, these costs may be substantial. 

Far from recommending to either buy or not buy an ETF, this article simply examines the components of an ETF’s total cost of ownership, explains how slippage arises when orders meet the order book, compares on-exchange execution with request-for-quote (RFQ) trading, and sets out how unlisted funds price differently.

What does the expense ratio actually cover?

The expense ratio accrues daily inside the fund’s NAV and pays for management, custody, and administration. Trading costs - commissions, the bid-ask spread, and any gap between execution price and fair value - are separate, and are borne by the investor at the point of transaction.

The two layers do not move together. State Street Investment Management, analysing the 100 largest US equity ETFs as of February 2026, found no correlation between expense ratios and bid-ask spreads. A fund chosen on its headline fee alone may cost more, all in, than a nominally dearer fund that trades more tightly.

What are the hidden costs of trading an ETF?

Three costs arise at the point of trade. 

1. First, the bid-ask spread: an investor buys at the ask and sells at the bid, so the spread is the compensation for market makers, which is paid in full even when commission is zero. Spreads widen when the underlying holdings are thinly traded, near the market open, and during volatile sessions.
2. Second, potential premiums and discounts. An ETF does not transact at NAV, its price is set by supply and demand on the exchange and can drift above or below the value of the underlying holdings. Arbitrage by authorised participants, who create and redeem ETF units against the underlying basket, normally keeps the gap small, but it can widen in stressed markets.
3. Third, market impact. The exchange displays a finite number of shares at each price. A large buy order consumes the shares offered at the best price, then fills at the next price up, then the next — pushing the average execution price above the quote first seen. A large sell order eats through the standing bids in reverse. This “walking of the book” is the dominant form of slippage for size, whether the order is HK$10,000 or HK$10 million.

How does RFQ execution differ from trading on the exchange?

On-exchange execution fills an order against the visible public order book, level by level. RFQ execution sends the intended trade simultaneously to several market makers, each of which responds with a firm price for the entire order; the investor picks the best quote and the whole trade executes at that single price. Competition may tighten the price, a single fill removes walking-the-book slippage, and market makers can quote sizes well beyond displayed volume because they can create or redeem units against the underlying basket.

Whether RFQ is automatically cheaper remains contested, and there may not be a definitive answer. For most retail investors in Hong Kong, the RFQ channel is not directly accessible - it is institutional infrastructure. 

But where a platform can route client orders through the RFQ channel rather than the public book, a retail investor gains the competitive quoting and single firm price that institutional desks rely on, without needing the counterparty relationships or infrastructure to reach those venues directly. For larger allocations - for example, when client money is pooled - that access may make a meaningful difference to the execution outcome. 

How do unlisted funds price differently?

Unlisted funds deal on a forward-pricing basis: every subscription and redemption received before the dealing cut-off transacts at the next NAV calculated after the order arrives. There is no bid-ask spread, because there is no continuous two-sided market; no premium or discount, because the transaction price is the NAV by definition; and no walking the book, because an HK$5,000 order and an HK$5 million order deal at the same forward NAV.

Execution costs do not vanish — the fund incurs transaction costs when it invests inflows, shared across all investors — but the point-of-trade costs an ETF investor bears individually are absent at the moment of dealing. The trade-off is intraday flexibility: a fund investor cannot act on a mid-morning price or use a limit order, and the exact transaction price is unknown when the order is placed.

What does this mean for your portfolio?

The practical conclusion is that “low cost” is a property of an investor’s whole arrangement — product, trading behaviour, and execution channel together — not of a fee table. An infrequent trader in a liquid, tightly quoted ETF may find the expense ratio a fair summary of cost. A frequent trader, or one dealing in size or in less liquid exposures, may pay more at the point of execution than in annual fees.

In our view, if cost is the largest determinant on whether to hold an ETF or a unit trust, it is worth looking at the investing behavior. But broadly speaking, both ETFs and unit trusts can be used to build a diversified portfolio. 

Investors trading ETFs directly can reduce execution costs with limit orders rather than market orders, by avoiding the open and periods of high volatility, and by preferring funds whose underlying holdings are liquid. Our advisers can help you assess which structure fits your investing pattern and goals.

On the one hand, ETFs offer intraday liquidity, transparent pricing, and decreasing headline fees. On the other hand, investors should look at trading costs on top of holding costs. 

Frequently asked questions

What is slippage in ETF trading?

Slippage is the difference between the price an investor expects when placing an order and the average price at which the order actually executes. It arises because prices move between placement and execution, and because large orders consume successive levels of the order book at progressively worse prices.

Do ETFs listed in Hong Kong have hidden costs?

ETFs listed on the Hong Kong Stock Exchange carry the same execution costs as ETFs anywhere: the bid-ask spread, potential premiums or discounts to NAV, and market impact on larger orders. These costs vary with the liquidity of each ETF and its underlying holdings, and with market conditions at the time of the trade.

What is RFQ execution and can retail investors in Hong Kong use it?

RFQ (request-for-quote) execution asks several market makers to compete on one firm price for an entire order, rather than filling against the exchange order book. It is used mainly by institutions trading in size. Retail orders in Hong Kong typically route to the exchange, though platforms that aggregate client flows may access institutional channels on their clients’ behalf.

Do unit trusts and other unlisted funds have bid-ask spreads?

No. Unlisted funds deal at a single forward-priced NAV, so all investors transact at the same price regardless of order size. Fund-level transaction costs still exist but are incurred inside the fund and shared across all investors, rather than paid individually at the point of trade.

Disclaimer

Risk Warnings

Investment involves risk. Past performance is not an indicator nor a guarantee of future performance or returns. Projected performance or returns is not guaranteed to materialise. The value of investments and the income from them can go down as well as up, and you may not get the full amount you invested. Rates of exchange may cause the value of investments to go up or down. Individual stock performance does not represent the return of a fund.

General risk warnings relating to collective investment schemes

Before making an investment decision, you are reminded to refer to the relevant prospectus/offering document for specific risk considerations and related fees and charges. Funds are not a bank deposit and not capital guaranteed, and are subject to investment risks, including the possible loss of the principal amount invested. Some of the funds also involve derivatives. Do not invest in them unless you fully understand and are willing to assume the risks associated with them.

Opinions

Any forward-looking statements, prediction, projection or forecast on the economy, stock market, bond market or economic trends of the markets contained in this material are subject to market influences and contingent upon matters outside the control of Endowus HK Limited (“Endowus”) and therefore may not be realised in the future. Further, any opinion or estimate is made on a general basis and subject to change without notice. In presenting the information above, none of Endowus HK Limited, its affiliates, directors, employees, representatives or agents have given any consideration to, nor have made any investigation of the objective, financial situation or particular need of any user, reader, any specific person or group of persons. Therefore, no representation is made as to the completeness and adequacy of the information to make an informed decision. You should carefully consider whether any investment views and products/services are appropriate in view of your investment experience, objectives, financial resources and relevant circumstances. You may also wish to seek financial advice through a financial advisor or the Endowus platform and independent legal, accounting, regulatory or tax advice, as appropriate.

No invitation or solicitation

Nothing contained in this article should be construed as a solicitation, an offer to buy or sell, or recommendation, to acquire or dispose of any security, commodity, investment or to engage in any other transaction in any jurisdiction in which such solicitation, offer to buy or sell would be unlawful under the securities laws in such jurisdiction. No information included in this article is to be construed as investment advice or as a recommendation or a representation about the suitability or appropriateness of any advisory product or service; or an offer to buy or sell, or the solicitation of an offer to buy or sell, any security, financial product, or instrument; or to participate in any particular trading strategy. Investors should seek independent financial and tax advice before making any investment decision.

This advertisement has not been reviewed by the Securities and Futures Commission or any regulatory authority in Hong Kong.

Endowus HK Limited (CE No. BQR225) is licensed by the Securities and Futures Commission for Type 1 (Dealing in Securities), Type 4 (Advising on Securities) and Type 9 (Asset Management) regulated activities.

‍