What are Expense Ratios?

Posted by Andrew Gordon on March 12

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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.

 

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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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