FIREDesk
Free guide · 4 min read
Are you overpaying for your funds? What costs do to the same money
ETFs were where I started. The first thing worth knowing is what they cost, because cost is the one part of investing you can control from day one.
1What an ETF is
An exchange-traded fund (ETF) is a basket of investments, such as hundreds of shares, that you buy and sell on an exchange like a single share. Many follow an index, which is why they are also called index funds. You get a slice of everything in the basket in one purchase, without picking companies.
2The cost that compounds against you
The total expense ratio (TER) is the yearly fee, taken from the fund automatically. You never get a bill: it shows up as slightly lower returns. Many low-cost index ETFs charge well under 0.25% a year. Many actively managed funds can charge 1% to 2% a year in total costs: check the documents of yours (the key information document lists them).
Here is $100,000 for 20 years at a 6% gross yearly return (constant returns, only to compare):
| Yearly cost | After 20 years |
|---|---|
| 0.10% (a low-cost index ETF) | about $314,700 |
| 0.75% | about $278,300 |
| 1.50% (a higher-cost fund) | about $241,200 |
| 2.00% | about $219,100 |
Between 0.10% and 1.50% the difference is about $73,500, or 23% of the larger result, on the same market. The longer the time, the bigger the gap: at 30 years it is about 33%.
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3Try it with your own numbers
An illustration of the effect of costs, not a forecast. Nothing is stored or sent.
4Check before you choose
- What index it tracks, and whether it is broad or narrow.
- The yearly cost (TER) and trading costs, compared with similar funds.
- How much it manages (its assets under management, in millions) and how much it trades. A very small fund can be closed or delisted by the provider, which usually returns your money at market value, at a moment you did not choose and possibly with tax effects. There is no official threshold, but many investors avoid funds with under about $100 million in assets.
- Where it is registered and whether you can buy it where you live. Taxes and available products depend on your country.
- Whether it accumulates or distributes dividends, and how that is taxed for you.
- What you will do if it falls 30%. Markets fall, and the fund does not protect you from that: your behavior does.
Next step
You have seen what costs do. With ETF Lab you can try different ETFs and weights with your own numbers and see how they would have behaved in the past and how far they can fall. It is free.
Prefer the long version? Read the full ETF guide.
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Legal. FIREDesk content is for educational purposes only and is not financial advice or an investment recommendation. FIREDesk does not give personal recommendations and does not know your situation. Fee levels are examples: check the actual costs of any fund in its documents. Examples use constant returns for illustration only; real returns vary and past performance does not guarantee future results. Investing involves significant risk, including the loss of the money invested. You are responsible for your own decisions. Disclaimer · Privacy