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Expense ratio in ETF

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  1. #1

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    Expense ratio in ETF

    I am a beginner in investing, and have been doing quite a lot of reading lately. Can someone please explain how the expense ratio in an ETF works?
    For example, suppose I am buying 1000$ of shares and the expense ratio is 1%. Am I actually paying 1010$ as an initial investment? Or is it spread over the whole year? What if after 6 months I decide to cash out?


  2. #2

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    you have to read the fine prints. for all of my short term ETF positions, i have not seen any expense ratio taken from my profit.


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    Are you not hit by redemption fees?


  4. #4

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    Original Post Deleted
    Hi jrkob,

    So if I understand correctly, if after a year the price of my investment is 1200$, I will be paying 20$ as ER?
    Does the ER also affect any dividend?

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    Original Post Deleted
    i buy Vanguard ETFs in the US market. my targets are usually very low expensive ratio and relatively high dividend. low expense ratio meaning lessn than 0.1%. "high" dividend meaning around 2.5% or higher. maybe since it's so low, and i hold them short term that i didn't really noticed. based on my rough calculation, they didn't charge me. unless they took it out from dividend distribution, then in that case, i have no idea.

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    Original Post Deleted
    Thanks for the explanation

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    To clarify this is what happens (could be wrong...).

    The NAV of the ETF is the real value of the assets it holds. Typically updated officially by the fund manager every day at close.

    Say the ETF has two stocks A (50% of holdings) and B (50% of holdings), A is valued at $45 and B is valued at $45 and $10 is held in cash by the manager. The manager distributes dividends every quarter.

    The NAV of one ETF share is $100 at market open. The fund has a 12% expense ratio (keeping this simple for 1 month calculation).

    You want to invest $1000. Which should technically allow you to buy 10 shares of the ETF (this fluctuates, for many reasons the ETF can be priced at slightly higher or below the NAV).

    You execute a transaction to buy 10 shares and you spend $1000 + brokerage fee.

    IGNORE COMPOUDING OF CHARGES for a very simple calculation

    A month later, if there is not change in the price and the fund manager has not rebalanced, you'll see the fund's NAV recalculated as follows:

    A - $45, B - $45, Cash - $10-$1, making the NAV $99.

    If you want to sell at this point, the NAV will be $99 and you'll sell closer to that value and take a 1% hit which can be attributed to the expense ratio.

    Month 2 - No change in prices, your NAV drops to $98.

    Month 3 - No changes in price, but the fund manager receives $10 in dividends. Your NAV is then calculated as $45+$45+$10+$8-$1(expense) = $107.

    Month 4 - The manager pays $8 as dividend to you. At the end of the month, your NAV will be $107-$8-$1 = $98.00

    Original Post Deleted
    - Something like that... ?

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    Simplified it a bit..


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    Actually, there isn't something officially called 'expense ratio' charged by the fund.
    There are items like management fees, custodian fees, brokerage, etc.etc

    Expense ratio is a resultant number that is, after adding all the things that are suppose to be included as cost of the fund for the period, then divided the number by the average (usually) daily NAV of the fund over the period of computation. that will give you a % term call the expense ratio. None of the fund manager will commit to you what is the expense ratio I believe. they will only tell you what are the cost. And i won't be surprised if some of the fund manager exclude items from their expense ratio reporting.


  10. #10

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    Quote Originally Posted by freeier:
    Actually, there isn't something officially called 'expense ratio' charged by the fund.
    There are items like management fees, custodian fees, brokerage, etc.etc
    I took a look at a random iShares ETF and found this in the fact sheet:

    TER = Total Expense Ratio
    TheBrit likes this.

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