You will be able to read a fund's total expense ratio and list the costs that sit outside it.
Farhan has his index map from lesson 2.4, Map indexes onto your allocation, and now he needs a fund for each line. He finds three ETFs on all-world indexes and does what most people do: he sorts them by expense ratio and reaches for the cheapest. Then he notices one of them trades on an exchange where his broker charges more per trade than the fee gap is worth to him in a whole year.
The expense ratio is the cost everyone looks at, and it is a real cost. It is also only one of several. This lesson shows you what it includes and what it leaves out.
The total expense ratio, or TER, is the yearly charge for running the fund, expressed as a percentage of the fund's assets. Some managers call it the ongoing charges figure. It covers the manager's fee and the fund's running costs such as administration, custody and index licensing.
You never pay the TER as a bill. It is taken from the fund's assets bit by bit through the year, so it shows up as a slightly lower unit price than you would otherwise have. A fund with a TER of 0.20% costs you about S$20 a year for every S$10,000 you hold in it. You find the figure on the fund's factsheet and in its key information document, and you should always use the one from the manager's own documents rather than a third-party site that may be out of date.
The TER is what the fund charges. Your own costs of buying and holding it are separate, and they come on top.
Brokerage commission: the charge per trade, often a minimum fixed amount plus a percentage, set by your broker. Platform or custody fees: some brokers charge a monthly or quarterly fee for holding your investments, especially for overseas-listed shares. Currency conversion: if the ETF trades in US dollars or another currency, converting your Singapore dollars costs something, either a stated fee or a spread built into the exchange rate. The bid-ask spread: the gap between the price you can buy at and the price you can sell at, covered in lesson 3.4.
Your broker publishes the first three on its fee page. The spread you see on the trading screen. All of them change, so note the date you checked.
For someone investing a large lump sum once, commission is a small fraction of the trade and the TER dominates over time. For someone investing a few hundred dollars a month, it is often the other way round.
Here is a made-up example. You invest S$500 at the start of every month for a year, a total of S$6,000. Your broker charges a made-up S$5 per trade, the fund trades in US dollars with a made-up 0.3% currency conversion cost, and you lose a made-up 0.1% to the spread on each purchase. The fund's TER is a made-up 0.20%.
Twelve trades at S$5 cost S$60. Currency conversion on S$6,000 at 0.3% costs S$18. The spread at 0.1% costs S$6. The TER applies to the money you actually held, which grows from S$500 to S$6,000 across the year and averages S$3,250, so it costs about S$6.50. Your all-in first-year cost is about S$90.50, which is roughly 1.5% of the S$6,000 you put in.
Now suppose a rival fund has a TER 0.07 percentage points lower. In that first year, the saving is about S$2.28. The commission alone is more than 25 times that. If the cheaper fund trades on an exchange where your broker charges more per trade, or needs a currency conversion the other one does not, it can easily cost you more in total.
As your balance grows, the balance shifts. On S$100,000 held for a year, the same 0.07-point TER gap is worth S$70 a year, every year. So the cheapest fund for a small monthly investor and the cheapest fund for someone with a large balance can be different funds, and the right one for you can change as your portfolio grows.
The habit to build is simple. Before choosing between funds, work out what each would cost you in a year at your actual investment pattern: how much you invest, how often and through which broker. Add the commission on each trade, any platform fee, currency conversion, an estimate of the spread, and the TER on your average balance.
There are ways to bring the trading costs down, such as investing every two or three months instead of monthly, or using a broker's regular savings plan if it has lower charges. Each has its own trade-off, and none of them changes the method, which is to compare yearly totals for your own pattern.
Farhan reruns his comparison with his own S$1,000 a month and his broker's published fees. The cheapest fund by TER drops to second place. In the activity, you will put your own numbers through the same calculation.
Work out the all-in first-year cost of investing a made-up S$500 a month in one ETF, using your broker's published fees and the fund's TER.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).