The total expense ratio (The total expense ratio (TER) The TER is the measure we use to determine how much it costs to run an ETF. Your ETF return is whatever the market delivers minus the cost of running the ETF. We only know the exact TER at the end of a period (usually a year), because even if the issuer can predict its More) is something us ETF nerds like to harp on about, and with good reason. Index-tracking products like exchange-traded funds (An exchange-traded fund (ETF) is a listed investment product. ETFs are usually index-tracking products, which means a single ETF share gives the holder exposure to an entire index—sometimes consisting of thousands of individual shares. ETFs give investors the opportunity to invest in entire markets easily and cheaply. ETF units (also called shares) can be bought wherever you buy ordinary shares, More) have two benefits. First of all, they reduce your exposure risk to a single share or sector. Secondly, they allow you to invest cheaply. The combination of the two is what ensures long-term returns for ETF investors.
Your ETF return is whatever the market delivers minus the cost of running the ETF. The TER is the measure we use to determine how much it costs to run an ETF. It is calculated by dividing the cost of running the fund by the amount of assets in the fund. That seems simple enough, but the measure is flawed. We only know the exact TER at the end of a period (usually a year), because even if the issuer can predict its costs exactly, it has no way of knowing how much will be invested in the fund at the outset. The fee is also built into the product. As investors we don’t have eyes on it before we pay it.
The costs of running an ETF
ETFs track indices. Mostly, the companies that issue ETFs aren’t the same companies that compile indices. ETF issuers therefore have to pay a licensing fee to companies like S&P and MSCI who compile indices.
ETF issuers buy and sell the shares represented in the An index is a tool we can use to measure movement over time. In the stock market, we use indices to track the performance of a selection of listed companies. This could include all the companies listed on the market, or all the companies in a certain sector. In inflation, we use an index to track the price of certain using the services of a market maker. While it sounds like an individual, the market maker is usually a group of people responsible for creating ETF units by buying and selling the underlying individual shares in the market. Some issuers have this services in-house while others use an external market maker, which can impact the TER.
When market makers buy and sell shares to create ETF units, they incur a brokerage fee just like we do when we buy and sell ETFs.
Legal and auditing fees:
ETF issuers have to comply with legislation to protect the Interest is how much it costs to borrow money. You can either earn interest when you lend money to somebody else or pay interest when you borrow money. Interest is the reason why debt is expensive. In addition the money you borrowed, you have to pay back an additional fee in exchange for using money that you didn't have. of investors. Ensuring continuous compliance involves legal and auditing costs.
Like any other business, ETF issuers have employees and offices that need to be paid. The good news is issuers of more than one ETF can add more products without adding too much to this expense, lowering the TER of all products over time.
How TER is paid
The TER can be a silent performance killer, because ETF investors never see this payment. The cost is taken out of your When a listed company shares profits with its shareholders, the cash amount paid to the shareholder account is called a dividend. It's usually expressed as cents per share or, in the case of ETFs, cents per unit. The more shares or ETF units you have, the more dividends you receive. Dividends make compounding possible in share investments. When you use More, so you might not realise that you are paying a high TER. This is true for ETFs that pay out dividends, as well as total return ETFs that reinvest dividends on your behalf. Unlike platform and brokerage fees that show up on statements, the TER gets deducted quietly from your dividend. It’s therefore up to you to keep a close eye on minimum disclosure documents to see how much your ETF cost you in the last year.
It is very possible for two ETFs to track the same index, but have different TERs. This is because some issuers are more efficient than others. If, for example, an issuer has an in-house market maker, it can keep tighter control on the costs. In that case, the ETF with the lower TER will always outperform the ETF with a higher TER.
We tend to focus on the costs we can see, like brokerage cost and platform fees. These do impact your An asset or item that is purchased with the hope that it will generate income or appreciate in the future. In an economic sense, an investment is the purchase of goods that are not consumed today but are used in the future to create wealth. In finance, an investment is a monetary asset purchased with the idea that the asset More return in the long run, but it’s important remember that they are not the only fees eating away at your investment.
Historical TERs are disclosed in minimum disclosure documents or fact sheets. Cost-conscious investors will keep an eye on that the historical TER over time.
In the below video, our friend Nerina Visser explains exactly what the TER pays for. As she explains here, a unit trust that tracks the exact same index as an ETF will likely cost more because of fees.