How to Calculate the True Cost of Index Funds and ETFs

OCF (or TER — Total Expense Ratio) is the annual management fee. Expressed as % of assets under management per year. Typical ranges: UK index fund (unit trust): 0.05-0.20% Global ETF (passive): 0.04-0.30% Actively managed fund: 0.50-1.50%+ OCF impact on £10,000 over 30 years (7% gross return): At 0.07% OCF (e.g. Vanguard FTSE All-World): £10,000 → £74,800 At 0.75% OCF (average active fund): £10,000 → £62,900 At 1.50% OCF (expensive active fund): £10,000 → £52,700 Difference between cheapest and expensive active: £22,100

Platform fee structures vary widely: Percentage-based (e.g. 0.15-0.45% per year): £50,000 portfolio at 0.25%: £125/year £200,000 portfolio at 0.25%: £500/year These cap at £200,000-£500,000 for most platforms. Fixed fee platforms (e.g. £120-£200/year): Better value for larger portfolios (above ~£50,000-£100,000) More expensive for small portfolios Trading fees (some platforms charge per trade): £0-£11.95 per trade For a buy-and-hold investor: minimal impact For an active trader: significant drag Best value: percentage platforms up to ~£50k-£100k, then fixed.

Funds pay trading costs when buying/selling underlying holdings. These are separate from OCF and disclosed in the KIID document. Look for: "Portfolio transaction costs" or "Transaction costs" Typical range: 0.01-0.10% per year for index funds True total cost = OCF + Transaction costs Vanguard FTSE All-World ETF (VWRP) example: OCF: 0.22% Transaction costs: 0.01% Total: 0.23% Actively managed fund example: OCF: 0.75% Transaction costs: 0.25% (higher turnover = more trading) Total: 1.00%

ETFs trade on an exchange with a bid (buy) and ask (sell) price. The spread is the difference — you always buy at ask, sell at bid. Spread on a major global ETF: typically 0.01-0.05% Spread on a less liquid ETF: 0.10-0.50%+ For a buy-and-hold investor making 4 purchases per year: Annual spread cost = Spread % x 4 purchases / 2 (one-way cost) At 0.05% spread: 4 x 0.025% = 0.10% per year This is negligible for long-term holders — significant for traders.

Example: £30,000 in Vanguard FTSE All-World ETF on Platform X OCF: 0.22% Transaction costs: 0.01% Platform fee: 0.15% Spread (4 purchases/year): 0.10% Total: 0.48% Annual cost: £30,000 x 0.0048 = £144/year vs a cheap unit trust on the same platform: OCF 0.06%, zero transaction cost, 0.15% platform, no spread Total: 0.21% = £63/year Difference: £81/year — small, but compounds to ~£4,600 over 30 years (at 7% return) on a £30,000 initial investment.