When investing, fees can be confusing. There are five fees or costs to be considered:
- The Moola fee
- The expense ratio of ETFs used in portfolios
- Bid/ask spreads
- Rebalance costs
Below we will run through each cost in turn starting with the Moola Fee:
The fee that goes to Moola is 0.75% per year. That means if you invest 2,000 pounds for a year, then Moola costs 15 pounds for that year. Costs are scaled according to the time you invest, if you invested that same amount for 4 months, the cost would be 5 pounds, if you invested for 2 years, the cost over that time would be 30 pounds.
The Moola fee is deducted from the cash element of your portfolio every month. This fee covers just about everything that Moola does and the only additional costs that we anticipate are listed below.
The ETFs used in our portfolios charge fees. We work to keep these fees as low as possible by comparison shopping for the most attractive ETFs for you. The exact expense ratio can vary over time. For a standard portfolio expense ratios are approximately 0.10-0.11% a year. For ethical portfolios it will costs you slightly more at between approximately 0.19-0.31% a year depending on your portfolio risk level. The fees for the ethical portfolios are slightly higher because of the greater costs in maintaining and monitoring ethical investments. These costs do not go to Moola, they go to the companies that provide the ETFs in your portfolio, companies such as Vanguard and UBS.
Expense ratios are paid from within the individual funds in your portfolio. Essentially the return you see on those investments is reduced by the amount of the fund cost.
When you buy or sell ETFs from the market you are always paying a little bit more or receiving a little less than what it is worth. This is the reward the trader on the other side of the trade gets for providing liquidity (the ability to buy and sell freely) and it's how they make a living. How much this costs depends on a host of factors such as the market environment and the funds involved. Moola portfolios are typically traded relatively infrequently which helps keep these costs low.
The price someone is willing to buy an ETF for is the bid. The price they are willing to sell it for is called the ask. The difference in price between the bid and ask is the bid/ask spread. The trading cost associated with buying at ETF is normally half the bid/ask spread.
The average trading cost at the time of writing for our standard portfolios is approximately between 0.06-0.07% and for our ethical portfolios it is approximately between 0.07-0.11% depending on what risk of portfolio you are in. Please note that these costs can change over time but the good news is that in recent years these costs have come down and with the continued rise in popularity of ETFs these costs are expected to fall more over time. You can find out more about bid/ask spreads here.
You don't pay a bid/ask spread directly. The money is not taken from your account, what happens is that you receive a slightly lower price when selling or pay a slightly higher price when buying.
As part of the Moola service we also provide the option to rebalance your portfolio to keep your portfolio risk and reward in balance and to reflect current market conditions. To do this we have to sell some parts of your portfolio and buy some other parts. There are therefore trading costs to this due to the effect of the bid ask spread. For our standard portfolios we estimate this to be on average 0.03% annually and for our ethical portfolios is 0.04% annually.
Finally, any gains on Moola accounts may be subject to taxation, especially those outside of an ISA. This is generally the case if you sell an investment that has risen in value. The amount of tax depends on a host of factors, but if your investment is positive you may owe some of your gains to the government in tax.
So that's the summary of all the costs of Moola's service. The base cost is 0.75% a year, which is the only portion that goes to Moola, but the total cost to you as an investor is likely to be approximately 0.88% a year for standard portfolios and approximately between 0.97-1.10%% a year for ethical portfolios. Exact costs in any given year will depend on trading frequency and relative fund performance. Finally, tax may be considered a cost too, once your investments are sold, should they be in taxable account and have risen in value.