(EN)
While ETFs trade like stocks, there are some differences when it comes to fees. Largely, that comes in the form of management expenses, which apply to ETFs.
Both passively and actively managed ETFs incur management expenses. This is typically expressed as a management expense ratio, or MER. Passively managed funds generally have lower fees than actively managed funds.
Management expense ratio (MER)
MER, also known as the expense ratio, is the annual fee that all funds charge shareholders for holding the fund. Expressed as a percentage of assets under management (AUM), it captures the management fee, operating expenses and taxes incurred by a fund on an annual basis. Operating expenses can cover items such as fund valuation costs, audit and legal fees and costs related to prospectuses and annual reports. The MER doesn't include sales commissions you may pay, or the fund's trading costs. A fund's prospectus will offer more information.
Management fee
This is an annual fee payable by the fund to the manager of the fund for acting as its trustee and manager. This fee forms the largest portion of the MER. It represents the costs shareholders paid for the fund's management and distribution over the past fiscal year, including custodian and valuation agents, registrar and transfer agents, and any other service providers retained by the manager.
Trading commissions
Since ETFs trade like stocks on an exchange, they are subject to commission when bought and sold.
Taxes
If you realize a capital gain when you sell your ETF, or if the ETF distributes capital gains at year end, you will have received taxable capital gains that must be included in your total taxable income. If you are receiving dividends1, interest, or other ordinary income from your ETF, that would also be considered taxable income to report on your income tax return.
Although a TFSA is a registered account providing the account holder with tax free income and capital gains for Canadian income tax purposes, a TFSA is not exempt from foreign withholding taxes. This is in contrast to RRSPs which may be exempt from foreign withholding taxes if the tax treaty between Canada and the foreign country allows the withholding tax exemption. Therefore, foreign withholding taxes may apply to distributions from foreign securities, including ETFs, stocks and bonds when held in a TFSA.
The information provided in this article is for general purposes only and does not constitute personal financial advice. Please consult with your own professional advisor to discuss your specific financial and tax needs.
Thank You!
You have been successfully subscribed to receive more Inspired Investor articles from RBC Direct Investing.
Your Subscription Failed
Your subscription to Inspired Investor has failed. Please try again at a later time.
View Legal Disclaimer
RBC Direct Investing Inc. and Royal Bank of Canada are separate corporate entities which are affiliated. RBC Direct Investing Inc. is a wholly owned subsidiary of Royal Bank of Canada and is a Member of the Investment Industry Regulatory Organization of Canada and the Canadian Investor Protection Fund. Royal Bank of Canada and certain of its issuers are related to RBC Direct Investing Inc. RBC Direct Investing Inc. does not provide investment advice or recommendations regarding the purchase or sale of any securities. Investors are responsible for their own investment decisions. RBC Direct Investing is a business name used by RBC Direct Investing Inc. ® / ™ Trademark(s) of Royal Bank of Canada. RBC and Royal Bank are registered trademarks of Royal Bank of Canada. Used under licence.
© Royal Bank of Canada 2023.
1Dividends earned pursuant to DRIP may be subject to requirements imposed by the Income Tax Act (Canada). It is your responsibility to ensure that any associated tax requirements or obligations are satisfied.
There may be commissions, trailing commissions, investment fund management fees and expenses associated with investment fund and exchange-traded fund (ETF) investments. On or after June 1, 2022, any trailing commissions paid to RBC Direct Investing Inc. will be rebated to clients pursuant to applicable regulatory exemptions. Before investing, please review the applicable fees, expenses and charges relating to the fund as disclosed in the prospectus, fund facts or ETF facts for the fund. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. For money market funds there can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you.
Any information, opinions or views provided in this document, including hyperlinks to the RBC Direct Investing Inc. website or the websites of its affiliates or third parties, are for your general information only, and are not intended to provide legal, investment, financial, accounting, tax or other professional advice. While information presented is believed to be factual and current, its accuracy is not guaranteed and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author(s) as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by RBC Direct Investing Inc. or its affiliates. You should consult with your advisor before taking any action based upon the information contained in this document.
Furthermore, the products, services and securities referred to in this publication are only available in Canada and other jurisdictions where they may be legally offered for sale. If you are not currently a resident of Canada, you should not access the information available on the RBC Direct Investing Inc. website.
EXPLORE MORE
Why Order Types Matter During Market Volatility
When markets swing, how you place a trade can make a difference
ETF Trends from the RBC Capital Markets Trading Floor - April 2025
Here’s what we saw on the trading floor in April 2025
ETF Trends from the RBC Capital Markets Trading Floor - March 2025
Here’s what we saw on the trading floor in March 2025