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How closely do you look at the fees charged on your ETF investments? The ongoing charges that are applied to your investment may look inconsequential but can have a material effect on your investment portfolio.
In this video, I take a look at exactly how much these fees are costing you, especially if you are investing in Actively managed ETFs.
This video is for informational and educational purposes only and should not be construed as financial advice.
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Further reading:
https://irishfinancial.ie/actively-managed-etfs-are-quietly-costing-you-thousands-of-euro/
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You may have already made an investment that is quietly costing you thousands of euro without you
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even realizing it. Later in this video I will be showing you my calculator which you can also use
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yourself to try and calculate exactly what the cost is of what I am going to tell you about right
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now so you're going to want to stick around for that. Back in 2019 the SEC, the Securities and
0:20
Exchange Commission in the United States, released an investor alert on their bulletin board
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highlighting the impact that fees and costs can have on your investment portfolio. One of these
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fees that I really want to dig into in this video is the ongoing fees charged by fund managers which
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on the face of it look very small but can really really add up over time. These ongoing fees are
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charged on every ETF and they will vary significantly depending on whether you are investing in a
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passive fund or an actively managed fund. These fees are generally shown as a percentage so every
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day there's a certain percentage of the total assets in that fund is taken away as fees for
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the running of the whole operation. Passive funds generally have very low ongoing fees
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That's basically because their strategy is set in stone. They just want to track whatever index
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they were following whether it's something like the S&P 500. So it's just a matter of copying
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exactly whatever the investments are and the weightings are in the underlying index. This is
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very formulaic and there's not much skill actually needed to do it so there's not much resources
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needed and thus the fees are much lower whereas the intention of an actively managed fund is to
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actually try and beat the market so try and get returns well in excess of the likes of the S&P 500
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but to do this they are going to need a lot of resources and experts to develop a strategy that
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can actually try and achieve this as well as all the administration costs and I'm sure they have
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built in a premium as well because you have the chance of getting a return better than the market The average ongoing fees of a passive fund are very low at something around 0 or 0 If they include a bit of currency hedging or
1:55
something else like that on top of the basic strategy then you can see fees of upwards of
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like 0.2% and then if we compare that to actively managed funds their average fees can range
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anywhere from 0.5% all the way up to 1%. These fees may seem very small but as you will see
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shortly they can really add up over time where you end up spending something like 500 euro a year
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now briefly it is back over to you i just want to ask you the question do you honestly know
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what fees are charged on the funds that you are currently invested in i have a bit of a bugbear
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with some of the online investment brokerages that they don't really clearly show what these fees are
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on the instrument details pages when you go and look at some of your funds like your vanguard your
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VUSA or VUSD they don't clearly show what these ongoing fees are. I know these fees are not charged
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by the likes of the zero and trading two and two it's actually the fund manager but it is an
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important part of your investment decision. You would really want to know what all the fees are
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as well as what they have there currently which is just the the order book really but thankfully
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you can find out what the fees are easily enough. Most brokerages will have this document section
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when you click into any instrument that you're interested in and you can go into the key investor
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information documents or the KIID and that will have all the details about that investment including
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what the fees you are going to be charged and this is exactly what one of them looks like here
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we're looking at the VUSD fund here and we can see clearly here that the fees the ongoing fees
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are 0.07 percent. Now that you have probably gone and checked out what the fees are that you're
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actually paying on your funds the next step is actually trying to work out is it actually worth
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it. Morningstar has a pretty grim stat on these actively managed funds that over the last 10 years
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up until June 2022 only one in four actively managed funds actually managed to beat the average of their passive rivals So that means the likely scenario for you is that you going to end up paying
3:45
these fees and not getting the return for it because the actively managed funds that you
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possibly are invested in is only going to match its passive rival or even perform worse than it
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This brings me on nicely to the thought experiment that I want to go through now
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I'm going to show you my calculator now and we will be able to work out together
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how much the fees are going to cost you if you are invested in an actively managed fund
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that is not actually going to end up beating the market. So bear with me for a moment when I talk out this thought experiment
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Okay so here is a calculator that we want to go through. So we're going to have a look at a 10-year period and a 20-year period of investment
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Because most people who are invested in ETFs are really looking for the long term
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The assumptions that I have made for this particular example is that we are going to have
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a growth rate of four percent every year and we're going to have an investment of 10 000 initially in
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the first year and 3 000 a year after that you can update these in your own time to your own example
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to match whatever you are investing as well and this will automatically update so i'll share this
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below in the comment section after the video and the next important bit of information here is that
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we are going to compare six different investors one investor has invested in some hypothetical
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fund that has zero fees another investor has invested in a fund that has an expense ratio of
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0.07 percent the next one is at 0.25 percent then 0.5 percent 0.75 percent and one percent this will
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help us clearly see how quickly the fees can build up so if we'll just leave it at the four percent
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and 3k invested every year let's have a look at how much fees you will pay after 10 years if you
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had invested in an ETF that only charges 0 you only pay fees of 225 euro which is actually pretty low over 10 years but as we can see as we increase the percentage in the fees even though the fees look quite small
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in percentage terms it kind of adds up quite quickly so somebody invested in an etf with a
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0.5 expense ratio will actually pay 1580 euro in fees and almost double that again if the expense
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ratio is 1% at 3,105 euro and as time goes on this really compounds so let's have a look at the next
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10 years the fees over the next 10 years really skyrocket so you're looking at 977 euro here
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for a fund that has an expense ratio of 0.07% a fund that has 0.5% then that increases to 6,759
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and for a person that has an ETF with an expense ratio of 1% they will have paid 13,000 euro in
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fees over that 20 year period so that's what's that over 20 years if i divide that by 20 so you're
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averaging 650 euro a year in fees which is quite a lot and these fees increase drastically the more
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you increase the growth rate and the amount that you actually invest so let's say for example we
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increase the growth rate here to six percent and we invest four thousand instead of three thousand
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a year you're looking at 21 500 euro in fees if you're invested in an actively managed fund with
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an expense ratio of 1% over a 20 year period that is really really high so you'd really want to be
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sure that you are getting returns well in excess of what the market is returning if you're going
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to be paying out those kind of fees I hope this calculator explains it well to you if you have
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any questions or anything please let me know down in the comment section as I said I'll leave this
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google sheets down here as well if you want to check it out I hope you found the video useful
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And if you did, please make sure and subscribe to my channel
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I would really appreciate it. And drop a like on the video would really help me out as well
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