Retirement pension reserves have surpassed 500 trillion won, and investment through defined contribution (DC) plans and individual retirement pensions (IRP) is growing rapidly. The share of performance-based products has doubled over the past three years, and exchange-traded fund (ETF) investments in particular have posted growth rates of more than 100% for three consecutive years, accounting for 40% of performance-based products and establishing themselves as a key investment vehicle. Several clear advantages explain why ETFs are drawing such attention.
First, ETFs are fundamentally diversified investment products. Equity ETFs are required to invest in at least 10 stocks. The second advantage is transparency. Unlike conventional funds, ETF holdings are disclosed transparently every day through the portfolio deposit file (PDF). The third is liquidity. Like stocks, ETFs can be traded in real time at any moment, allowing investors to respond immediately to the market. Finally, low costs are also a major attraction. As of May this year, the average management fee for domestically listed ETFs stood at around 0.3%, and amid intensifying competition, more than 50 ultra-low-fee ETFs now charge fees in the 0.01% range.
Then is it really enough to look only at management fees (total expense ratio) when investing in ETFs? Management fees are the cost investors can most easily check when buying and selling ETFs. For this reason, management fees are often the only figure emphasized. But investing based solely on the surface-level management fee can result in a heavier cost burden than expected. That is because it is easy to overlook the "bid-ask spread," a hidden factor that determines the actual total cost of ownership (TCO). While the management fee is an explicit cost paid to the asset manager, the bid-ask spread is an implicit transaction cost paid every time a trade is made in the market. It refers to the difference between the bid and ask prices at which an investor wants to trade, and it varies depending on the product's liquidity and trading volume.
According to a comparison by global asset manager Vanguard of costs by annual trading frequency for U.S. and European ETFs, management fees were the main cost for long-term holders, while the bid-ask spread was the main cost for rebalancing investors. In Europe in particular, management fees ranged from 0.07% to 0.2%, similar to or even lower than those in the U.S., but the bid-ask spread in Europe was 0.03% to 0.1% per trade, roughly three times larger than in the U.S. This was because ETF liquidity in Europe was only one-fifteenth of that in the U.S. As a result, total costs for European investors rose sharply once trading frequency reached four times a year or more. Therefore, investors who frequently rebalance their ETF portfolios for asset allocation or retirement fund management should not look only at management fees but also consider the ETF's liquidity and bid-ask spread.
From this perspective, trading hours should also be watched carefully when trading ETFs. During the first five minutes after the regular market opens (9:00 a.m. to 9:05 a.m.) and during the closing single-price auction period (3:20 p.m. to 3:30 p.m.), when liquidity providers (LPs) are exempt from their obligation to provide quotes, bid-ask spreads can widen or abnormal prices can form. An investor who approaches ETFs based only on the surface-level management fee may end up paying a much higher cost during the trading process by trading at times when liquidity is insufficient or unfavorable.
In investing, "cheap and good" cannot be judged by the visible fee figures alone. Most ETF costs are determined at the moment of trading. Since rebalancing is important in building wealth, investors must also develop a careful eye for hidden, real-world transaction costs.
