Read a fund's total expense ratio and list the costs it leaves out.
Farhan has built his index map in Lesson 2.4, "Map indexes onto your allocation", and is now choosing a fund for each line of it. For the all-world line he has found three ETFs that track all-world indexes. His plan is to sort them by expense ratio and buy the cheapest.
Most people pick an ETF this way. The expense ratio is a real cost, but you pay several other costs alongside it. Before Farhan buys anything, he adds up a full year of all of those costs for each of the three funds.
The total expense ratio (TER) is the yearly charge for running the fund, given as a percentage of the fund's assets. Some managers call the same number the "ongoing charges figure". It pays the manager's fee and the fund's running costs, such as administration, custody and index licensing. At 0.20%, for example, you pay about S$20 a year for every S$10,000 you hold (an illustration).
You never receive a bill for the TER. The fund takes it from its assets a little at a time through the year, so the only place you see it is in a unit price slightly lower than it would be without the charge. You can usually find the TER on the fund's factsheet, and in its prospectus or other fund documents. Take it from the manager's own documents, because a third-party site may be out of date.
The TER covers only what the fund charges. What it costs you to buy and hold the fund is separate and comes on top of the TER.
The TER leaves out four costs. Brokerage commission is the charge your broker makes each time you trade, often a fixed minimum plus a percentage. A platform or custody fee is a monthly or quarterly charge some brokers make for holding your investments, most often for overseas-listed shares. A currency conversion cost applies when the ETF trades in US dollars or another currency other than SGD. Changing your Singapore dollars costs either a stated fee or a spread built into the exchange rate. The bid-ask spread is the gap between the price you can buy at and the price you can sell at. Lesson 3.4 covers the spread in more detail.
Your broker lists its commission, platform or custody fees and conversion costs on its fee page. The spread shows on the trading screen. All of these figures change over time, so write down the date you checked them.
Take someone who puts S$500 into a fund at the start of every month for a year, S$6,000 altogether (all figures in this example are made up). Their broker charges S$5 per trade. The fund is priced in US dollars, and conversion costs 0.3%. The spread costs 0.1% on each purchase, and the TER is 0.20%. The costs for the year are:
Commission: 12 trades x S$5 = S$60. Currency conversion: 0.3% of S$6,000 = S$18. Spread: 0.1% of S$6,000 = S$6. TER: the balance rises from S$500 to S$6,000 across the year, averaging S$3,250, and 0.20% of S$3,250 is about S$6.50.
The total for the first year is about S$90.50, roughly 1.5% of the S$6,000 invested. A rival fund with a TER 0.07 percentage points lower would save about S$2.28 over that year (an invented figure). The S$60 of commission is more than 25 times that saving.
Which cost matters most depends on how you invest. If you put in one large lump sum, commission is a small fraction of the trade and the TER costs you more over time. If you invest a few hundred dollars a month, it is often the reverse, and trading costs outweigh any difference in TER. A fund with a lower TER can cost more in total if it is listed on an exchange where your broker charges more per trade. It can also cost more if it needs a currency conversion that the other fund does not.
TER differences carry more weight as your balance grows. On S$100,000 held for a year, the same 0.07-point gap is worth S$70 a year, every year (an illustration). The cheapest fund for someone investing a small amount each month can be a different fund from the cheapest one for someone with a large balance. The right fund for you can change as your portfolio grows.
Farhan's comparison shows this. One of his three funds is listed on an exchange where his broker's per-trade charge is more than the fee gap would save him in a whole year. He runs the numbers again with his own pattern of S$1,000 a month and the fees his broker publishes. The fund with the lowest TER moves down to second place.
If trading costs are high for your pattern, you have two ways to cut them. You can buy every two or three months instead of every month, or you can use your broker's regular savings plan if it charges less. Each option has trade-offs of its own. Whichever one you choose, you compare the funds the same way: add up the yearly total for how you invest.
First write down how you invest: the amount, how often you buy and which broker you use. Then add up a year of costs for each fund on your shortlist. Multiply the per-trade commission by the number of trades. Add any platform or custody fee, the conversion cost if the fund trades in a foreign currency, an estimate of the spread, and the TER applied to your average balance for the year.
Take the commission, platform and conversion figures from your broker's fee page. Take the spread from the trading screen and the TER from the manager's own documents. Note the date beside your figures. Pick the fund with the lowest yearly total for your pattern. As your balance grows, run the comparison again, because a different fund may become the cheapest.
In the activity, you will put your own numbers through the same calculation.
Take a made-up S$500 a month going into one ETF. Using your broker's published fees and the fund's TER, work out the all-in cost for the first year.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).