ongoing charge
Also called: expense ratio, TER, total expense ratio, ongoing fee
The yearly fee a fund takes from its assets, as a percentage, also called the expense ratio or TER.
The ongoing charge, also called the expense ratio or TER, is the yearly fee a fund takes from its assets to run itself. It is shown as a percentage, for example 0.2% a year. You never see a bill: the fee is taken little by little from the fund's value, so your return is simply lower.
A fee that sounds tiny adds up because it compounds. Each year's fee is money that would have grown in the following years. Over 30 or 40 years of monthly investing, the gap between a cheap fund and an expensive one can reach a third of the final balance.
The ongoing charge is not the whole cost of owning a fund. Spreads, currency conversion, platform fees and taxes on dividends can be larger than the fund's own fee. To compare funds fairly, add up the all-in yearly cost and check the tracking difference: how far the fund lagged its index.
Example
Zapas models $100 a month for 40 years at 5% a year before costs, after inflation: $48,000 paid in, $148,252 with no costs at all. With 0.2% all-in costs the balance is $141,088 (4.8% less); with 1.5% it is $103,078 (30.5% less); with 2.5%, $81,806 (44.8% less). The gap between 0.2% and 1.5% alone is $38,011.
In the first year of a $1,000 deposit, the fund's own fee is just $2 of $30 in total costs; currency conversion on the way in and out is $20, two thirds of the total. The numbers are illustrative.
Common mistakes
- Treating the headline fee as the full cost of owning a fund.
- Dismissing "only 1% a year" without working out what it costs over decades.
- Comparing ongoing charges and ignoring the tracking difference.
- Investments can fall, and you can get back less than you put in.
Learn it in the course
- Reading a factsheet: index fund, ETF, accumulating, tracking difference, domicile · What the lines on a fund factsheet mean and which of them change what you actually pay and get.
- Every layer of cost: fee, spread, FX, platform, tax drag · Follow 1,000 dollars through every cost of owning a fund and add them up all-in.
- Case: pick the fund line-up from six factsheets · Choose three funds for the app from six factsheets, comparing them all-in rather than by headline fee.
- What 0.2% vs 1.5% does over 10 to 40 years · How much of the final balance different all-in costs take over decades of monthly contributions.