How are ETF fees deducted?

Investment management fees for exchange-traded funds (ETFs) and mutual funds are deducted by the ETF or fund company, and adjustments are made to the net asset value (NAV) of the fund on a daily basis. These management fees are never directly seen on any investor statements and are handled in-house by the fund company.

Each day, an ETF company experiences expenses such as salaries, utility expenses and research expenses. The net gross assets of a fund are adjusted downward by these daily expenses to arrive at the NAV. Some smoothing within the accounting departments of the fund may take place to even out these expenses over time, but the overall stated investment management fee is taken away from the NAV as evenly as possible.

Assume an ETF has a stated annual expense ratio of 0.75%. On an investment of $50,000, the expected expense to be paid over the course of the year is $375. If the ETF returned precisely 0% for the year, the investor would slowly see his $50,000 move to a value of $49,625 over the course of the year. The net return the investor receives from the ETF is based on the total return the fund actually earned minus the stated expense ratio. For example, if the ETF perfectly tracks the Standard and Poor's 500 Index and the index itself returned 15% last year, the investor would see his ETF increase in value by 14.25%. This is the total return minus the stated expense ratio.