How We Rate ETF and Mutual Fund Costs
Summary
A key component of our Predictive Rating, Total Annual Costs reflect the all-in cost of a minimum investment in each fund assuming a 3-year holding period, the average holding period for mutual funds[1].
This rating reflects all expenses, loads, fees and transaction costs in a single value that is comparable across all ETFs and mutual funds.
In each of our ETF and mutual fund reports, we also provide the ‘Accumulated Total Costs vs Benchmark’ analysis to show investors, in dollar-value terms, how much money comes out of the their pocket to pay for fund management. This analysis assumes a $10,000 initial investment and a 10% annual return for both the fund and the benchmark – so comparison between the fund and benchmark is apples-to-apples.
Our goal is to give investors as accurate a measure as possible of the cost of investing in every fund to determine whether this cost of active management is worth paying.
Details
The Total Annual Costs Ratings are calculated using our proprietary Total Annual Costs metric, which is my apples-to-apples measure of the all-in costs of investing in any given fund.
Total Annual Costs incorporates the expense ratio, front-end load, back-end load, redemption fee, transaction costs and opportunity costs of all those costs. In other words, Total Annual Costs captures everything to give investors as accurate a measure as possible of the costs of being in any given fund.
Total Annual Costs are calculated assuming a 10% expected return and a 3-yr holding period, the average holding period for mutual funds[1].
Total Annual Costs is the incremental return a fund must earn above its expected return in order to justify its costs. For example, a fund with Total Annual Costs of 8% and an expected return of 10% must earn a gross return of 18% to cover its costs and deliver a 10% return to investors.
The following chart shows the distribution of the Total Annual Costs for the 400+ ETFs and 7000+ mutual funds we cover.