What are Expense Ratios?

Posted by Andrew Gordon on March 12

Fees - Expense Ratio.jpg

Image From: GotCredit.com

Each ETF will have a fund manager that manages the fund. The expense ratio is the cost that you as an investor pay for the fund to be managed and other costs associated with running a fund. It is also known as the management fee.

The expense ratio is normally quoted in percentage terms for the year. For example, if the expense ratio is 0.20% this means that you will pay a fee of 0.20% of the amount you have invested in the ETF to the fund manager over the course of a year.

This fee, however, isn’t just charged at the end of the year. A little bit is charged every day. In this example the daily fee would be 0.20% / 365 = 0.00055%. This is deducted from the cash element of the ETF automatically by the ETF provider. As a holder of the ETF you would not see this happening, it happens in the background, but it does reduce your return relative to the index you’re tracking over time.



Written by Andrew Gordon

Andrew is the Head of Algorithmic Trading at Moola. He previously worked on the ETF Trading Desk for three and half years at Susquehanna International Group, a global quantitative trading firm. Andrew has a degree in Finance from Queen’s University Belfast.

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