How do ETFs generally have lower operating expenses compared to traditional mutual funds?

ETFs, or exchange-traded funds, generally have lower operating expenses compared to traditional mutual funds primarily because they are passively managed. In a passive management strategy, the fund aims to replicate the performance of a specific index rather than actively selecting securities based on research and analysis. This means that the fund does not require the extensive resources associated with managing a portfolio actively, like research departments or frequent trading strategies.

As a result, the management fees for passively managed ETFs are typically lower than those for actively managed mutual funds, which involve ongoing analysis and decision-making by portfolio managers. This lower cost structure contributes directly to the overall lower operating expenses of ETFs.

In contrast, actively managed funds typically incur higher costs due to the research and trading activities required to try to outperform the market. Lower trading frequencies and the lack of a need for high levels of research in passively managed ETFs also reduce transaction costs, further contributing to lower expenses.