Commission is marked as the right answer. However, commision-free trading is common these days among brokers. Wouldn’t be a difference between NAV and market price(e.g markup) the cost of investing in such funds?
P.s I understand the point and that traditional brokers still apply commissions.
P.p. s a similar question is
I think I’m mistaking this with ETFs. Anyway, your comment and explanation is appreciated.
P.s to add: speaking of commissions, Vanguard notes commission for VOO (similar to SPY) however there is no commission if you buy this ETF with commission free brokers. Now I remember I tried and failed to understand how all these commissions questions work today, if you please.
Hi @Calm_scarlet_beetle - great questions.
Whether we’re discussing closed-end (publicly traded) funds, ETFs or anything trading in the secondary market (including stock), you should assume commission is assessed on the purchase. While many large discount broker-dealers (e.g. Fidelity, Robinhood, Schwab, E-Trade) do not charge commission anymore, this is not true for most broker-dealers. Smaller, boutique, and “full service” broker-dealers continue to charge commissions regularly to their clients, and the test writers assume this as a generality.
I believe test questions in the future will begin to acknowledge the world we’re living in today, but we’ve found no indication the test is reflecting that today. Bottom line - assume anything traded in the secondary market is subject to a commission unless the question says otherwise.
Continuing the commission topic, got to the next chapter and there is another question:
“Paying commissions on each transaction in not an advantage, comparing to a no-load mutual fund”
Could you share what the test writers consider the commissions in case of such ETF/stock trades? Let’s assume some SPY shares were bought through a smaller broker and I found that SPY charges 0.095% fee annually (not sure how are they paid) vs. up to 0.25% no-load mutual fund. So what’s the transaction fee load in this case that is counted in?
p.s. Thank you for your answers, because this commission legacy is really confusing and kind of abstract to me
I think you may be conflating commissions with expense ratios. Commissions are transaction fees paid to the broker facilitating the transaction. Expense ratios represent all the costs of managing a pooled investment (e.g. mutual fund, ETF, closed-end fund), which is charged by the fund itself. For example:
An investor purchases 100 shares of a Vanguard S&P 500 ETF at $300 per share through their broker. A $50 commission is paid to the broker, while Vanguard assesses a 0.1% annual expense ratio on the ETF.
Commissions are a one time, out of pocket expense that is added to the total cost of the transaction. In this scenario, the investor pays a total of $30,050 to purchase the Vanguard ETF ($30,000 total share cost + $50 commission). The 0.1% annual expense ratio is internally assessed by the ETF itself, and is not an expense the investor pays “out of pocket.” The fund manager pulls money from the assets of the ETF to pay for the expense ratio, so most investors don’t even notice expense ratio costs.
The 0.095% annual fee you mentioned is the expense ratio of SPY. It is assessed the same way as the 0.1% expense ratio I mentioned above. The 0.25% you mentioned is likely in reference to 12b-1 fees, which are essentially marketing fees. They are part of the expense ratio and assessed in the same manner.
Commissions, on the other hand, always add to the purchase price or subtract from the sales proceeds during a transaction. They are very visible and will always be located on a customer’s trade confirmation.
Does this clear it up?
Yes, the idea of out of pocket expenses vs. pulling from the assets made it clear. Thank you!