What a fund really costs
The yearly fee is on the label. What the fund really cost you shows in how far it trailed its index.
The yearly fee
The ongoing charge (often called TER) is taken from the fund’s value a little every day. You never get a bill: the price is simply lower than it would be. A world index fund often charges between 0.1% and 0.3% a year.
Tracking difference
Compare the fund’s return with its index over a year. If the index made 8.00% and the fund 7.85%, the fund trailed by 0.15 points. That gap, the tracking difference, is the cost you really paid.
Why it can beat its fee
Some funds lend their shares to other investors for a fee, or pay less tax on dividends than the index assumes. Then the gap can be smaller than the yearly fee, sometimes even positive.
Why small numbers matter
Over 30 years, 1% a year takes about a quarter of what you would have had. 0.2% a year takes about 6%. Comparing two funds on the same index, cost is one of the few things you can know in advance.
Key takeaways
- The yearly fee comes out of the price; there is no bill.
- Tracking difference shows what the fund really cost.
- Over decades, fractions of a percent become large sums.