ETF Management Fee

ETF (Exchange Traded Fund) is an investment product listed and traded on the stock exchange, which allows investors to conveniently track the performance of an index, market or theme. One of the advantages of ETFs is that the cost of keeping them is relatively low, but do you know what the management fees of ETFs are? And how does it affect your investment performance? This article will answer these questions for you and provide some advice on selecting ETFs.

What are ETF management fees?

ETF management fees, also known as total management fees (Expense Ratio), refer to the fees that ETFs charge investors every year to pay for the operating costs of ETFs, including manager fees, custody fees, listing fees, transaction fees, etc. ETF management fees are usually expressed as a percentage. For example, 0.5% means that 0.5% of the investment amount is charged as a management fee every year.

The ETF management fee is a built-in fee, which means it is deducted directly from the ETF's net asset value (NAV) without investors having to pay separately. Therefore, ETF management fees will reduce the actual return rate of ETFs, which means that higher management fees will lead to lower investment performance.

How do ETF management fees affect your investment performance?

To understand how ETF management fees affect your investment performance, we can use an example to illustrate. Suppose you have two options, namely A and B ETFs tracking the Taiwan 50 Index (0050). The management fee for ETF A is 0.43%, and the management fee for ETF B is 0.35%. Assuming that the Taiwan 50 Index rises by 10% within one year, what will be the returns of the two ETFs A and B respectively?

Return rate of A ETF = 10% 0.43% = 9.57%

Return rate of B ETF = 10% 0.35% = 9.65%

It can be seen that although both ETFs track the same index, their return rates are also different because of different management fees. ETF B earned 0.08% more than ETF A. This difference may seem small, but when you consider long-term investment and the effects of compound interest, the difference becomes very significant.

Suppose you invest 1 million yuan in ETF A or B and hold it for 10 years. Assuming that the Taiwan 50 Index rises by 10% every year, how much will your investment amount become in 10 years?

Investment amount of A ETF = 1 million x (1 + 9.57%)^10 = 2.493 million

B ETF investment amount = 1 million x (1 + 9.65%)^10 = 2.512 million

It can be seen that ETF B earned 19,000 yuan more than ETF A. This is the impact of management fees on investment performance.

How to choose an ETF?

As can be seen from the above example, choosing ETFs with low management fees can help you save costs and increase returns. But this doesn’t mean that you only need to look at the management fees to decide which ETF to choose. In addition to management fees, there are other factors to consider, such as:

Does the index or market the ETF tracks meet your investment objectives and risk tolerance?

Does the ETF accurately track its benchmark index? This can be measured by looking at Tracking Error or Tracking Difference.

Does the ETF have sufficient liquidity and trading volume? This can affect whether you can get a deal at a reasonable price when entering or exiting the market.

Does the ETF have a dividend policy? If so, are dividends paid out in cash or reinvested? This affects your cash flow and tax issues.

Therefore, when choosing an ETF, you need to consider various factors and compare the advantages and disadvantages of different ETFs. At the same time, you also need to review and adjust your investment portfolio regularly to ensure that it meets your long-term goals.