Robinhood ETF Fees | How Expense Ratios Work on Robinhood

Jul 25

You can buy and sell ETFs on Robinhood without paying any commissions or fees, but that doesn’t mean ETFs are free of costs.

In this article, we’ll explain how Robinhood ETF fees work, what an expense ratio is, and how it affects your returns.

Robinhood ETF Fees Explained

Robinhood is a popular online brokerage that offers commission-free trading of stocks, ETFs, options, and cryptocurrencies. This means that you don’t have to pay any fees to Robinhood when you buy or sell shares of an ETF on their platform. However, this doesn’t mean that there are no fees associated with ETFs at all.

All ETFs, regardless of where you buy them, come with fees that are charged by the fund providers, such as Vanguard, BlackRock, or Invesco. These fees are known as expense ratios, and they represent the annual cost of running and managing the fund. Expense ratios are expressed as a percentage of the fund’s assets, and they are deducted from the fund’s net asset value (NAV) every day.

For example, if an ETF has an expense ratio of 0.5%, it means that the fund provider charges $5 for every $1,000 invested in the fund per year. This fee is not charged directly to you as an investor, but rather it reduces the value of the fund over time. The higher the expense ratio, the lower the returns you can expect from the fund.

The no-fee feature that Robinhood advertises is the ability to buy and sell shares of an ETF without paying any commissions or transaction fees to the broker. This can save you money compared to other brokers that may charge you a flat fee or a percentage of your trade value every time you make a trade. However, this does not affect the expense ratio of the ETF itself, which is set by the fund provider and applies to all investors who hold the fund.

What is an Expense Ratio?

An expense ratio is a measure of how much it costs to operate and manage an ETF or a mutual fund. It includes various expenses such as administrative costs, legal fees, accounting fees, marketing costs, auditing fees, and management fees. The expense ratio is calculated by dividing the total annual expenses of the fund by its average net assets.

The expense ratio does not include other costs that may affect your returns, such as trading costs, bid-ask spreads, taxes, or brokerage fees. These costs vary depending on how often you trade, what broker you use, and what tax bracket you are in.

Expense ratios are important because they affect your returns over time. The higher the expense ratio, the more money you pay to the fund provider and the less money you keep for yourself. While expense ratios may seem insignificant, a slight difference can make a big difference over many years.

Free Commission Stock Trades vs. ETF Fees on Robinhood

Robinhood is known for offering free commission stock trades for both stocks and ETFs. This means that you don’t have to pay any fees to Robinhood when you buy or sell shares of an ETF on their platform.

However, this does not mean that there are no fees associated with ETFs at all. As we explained earlier, all ETFs come with expense ratios that are charged by the fund providers, not by Robinhood. You can buy ETFs without paying commissions to Robinhood, but you still have to pay the expense ratio fee to the fund provider.

The expense ratio fee is not charged directly to you as an investor, but rather it reduces the value of the fund over time. The higher the expense ratio, the lower the returns you can expect from the fund. Therefore, when you choose an ETF to invest in, you should pay attention to its expense ratio and compare it with other similar ETFs.

For example, let’s say you want to invest in a broad market index ETF that tracks the S&P 500. You have two options on Robinhood: VOO and SPY. Both ETFs track the same index and have similar performance, but they have different expense ratios. VOO has an expense ratio of 0.03%, while SPY has an expense ratio of 0.09%. This means that VOO is cheaper than SPY by 0.06% per year.

How do Expense Ratios Work on Robinhood?

Expense ratios work the same on Robinhood as on any other brokerage. They are not charged by Robinhood but by the fund providers who run and manage the ETFs. They are deducted from the fund’s net asset value (NAV) every day, which means that they reduce the value of the fund over time.

The NAV of an ETF is the total value of its underlying assets divided by the number of shares outstanding. It represents the fair market value of one share of the ETF. The NAV of an ETF changes every day based on the performance of its underlying assets and the expenses incurred by the fund.

Of course, in reality, the fund’s underlying assets do change in value every day, which affects its NAV as well. The fund’s NAV can go up or down depending on how well or poorly its underlying assets perform. However, regardless of how the fund’s underlying assets perform, the expense ratio will always reduce its NAV by a certain percentage every year.

Are There Additional Robinhood ETF Fees?

No, Robinhood does not charge any additional fees or commissions to buy or sell an ETF or a stock on its platform. However, there are some other fees that may apply to your account or your trades, depending on your situation.

Some of these fees include:

Regulatory transaction fee: This is a fee that FINRA charges to brokerage firms like Robinhood to recover the costs of supervising and regulating these firms. Robinhood passes this fee on to its customers for sell orders only. The fee is based on a percentage of your trade value and is subject to annual and mid-year adjustments by FINRA.
Trading activity fee: This is another fee that FINRA charges to brokerage firms like Robinhood to recover the costs of supervising and regulating these firms. Robinhood passes this fee on to its customers for both buy and sell orders of stocks and options only. The fee is based on a fixed amount per share or per contract and is subject to annual adjustments by FINRA.
American depositary receipt fee: This is a fee that some banks charge for holding foreign stocks that trade on US stock exchanges as American depositary receipts (ADRs). These fees are typically deducted from the dividends paid by the foreign stocks or charged to your account periodically. The fees vary depending on the bank and the stock, and they are usually disclosed in the ADR prospectus.
Margin interest: This is a fee that Robinhood charges to customers who borrow money from them to trade on margin. Margin trading allows you to use leverage to increase your buying power, but it also involves more risk and interest charges. The margin interest rate is based on the amount of money you borrow and the current market rates, and it is charged daily to your account.
Gold subscription fee: This is a fee that Robinhood charges to customers who subscribe to their premium service called Robinhood Gold. Robinhood Gold offers various benefits, such as access to margin trading, larger instant deposits, professional research reports, and Level II market data. The subscription fee is based on your chosen tier and is charged monthly to your account.

You can find more details about these fees and their current rates on Robinhood’s fee schedule.

How are Expense Ratios Paid on Robinhood?

Expense ratios are paid on Robinhood the same way as on any other brokerage. They are not paid directly by you as an investor, but rather they are deducted from the fund’s net asset value (NAV) every day by the fund provider. This means that you don’t see a separate charge for expense ratios on your account statement or your trade confirmation, but rather you see a lower value of your ETF shares over time.

The expense ratio fee is not charged by Robinhood but by the fund provider who runs and manages the ETF. The fund provider sets the expense ratio and collects the fee from the fund’s assets every day. The expense ratio fee is not negotiable or refundable, and it applies to all investors who hold the fund.

Robinhood ETF Fees | Bottom Line

Robinhood offers commission-free trading of stocks and ETFs, which means that you don’t have to pay any fees to Robinhood when you buy or sell shares of an ETF on their platform. However, this does not affect the expense ratio of the ETF itself, which is set by the fund provider and applies to all investors who hold the fund.

Therefore, when you choose an ETF to invest in, you should pay attention to its expense ratio and compare it with other similar ETFs. You should also consider other factors such as performance, risk, diversification, liquidity, and tax efficiency. Essentially all ETFs come with expense ratios and fees, so you can check out our article about tastytrade vs. Robinhood to check out another low fee broker.

If you want to learn more about investing in stocks and ETFs on Robinhood or other platforms, join the HaiKhuu Trading community today.

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