When you're picking an ETF, it's essential to understand the expense ratio. This number tells you how much of your investment will go towards management fees and other costs. It's expressed as a percentage and can vary from fund to fund. In this guide, we'll explain what the expense ratio is, and show you how to get it on your spreadsheet.
What is an ETF expense ratio, and why is it important for investors to know about it?
An ETF expense ratio is the amount of money charged annually, expressed as a percentage of your total assets in a fund. It typically includes management fees and other operational expenses like trading costs and taxes. This number can vary dramatically depending on the type of ETF you invest in.
Knowing this number can help investors pick more cost-effective investments. This is because the lower the expense ratio, the more your investment goes towards actual investments instead of fees. In fact, the same performance of an ETF with a 1% difference in its expense ratio can add up to a huge difference in profits over time. Therefore investors should be aware of this number and pick the ETFs and funds not only based on performance but also on the expense ratio since this will directly impact their profits.
How to calculate an ETF expense ratio?
The expense ratio for ETFs is typically listed in their prospectus, but you can also find it on financial websites such as Morningstar or other third-party independent sources. Calculating the expense ratio yourself requires some manual work, but it's relatively easy once you have all of the data. First, you'll need to list your ETF expenses and divide that number by the fund's average net asset value. Finally, you'll multiply the result by 100 to get the expense ratio expressed as a percentage.
Altogether the formula for calculating the expense ratio is Expense Ratio = (Expenses / Average Net Asset Value) x 100.
For example, if your ETF has total annual expenses of $50 million and an average net asset value of $2 billion, the expense ratio would be 2.5%.
This means that, for every $1 you invest in this ETF, 2.5 cents would go towards fees and other costs.
Advantages of using ETFs with lower expense ratios
ETFs with lower expense ratios offer several advantages to investors.
- They will save money on fees that would otherwise be taken from your investment, meaning you'll have more money to invest in other areas.
- Lower expense ratios also tend to result in better performance over time as more of the assets are invested instead of spent on fees and costs.
- Finally, because ETFs with lower expense ratios usually have higher quality investments, they can be more reliable in the long run and provide better returns.
How to find low-expense Ratio ETFs and Funds?
The best way to find low-expense Ratio ETFs is to build an ETF screener. You can check out the entire guide here however, here are some of the most important things to keep in mind.
Step 1 – Find an ETF stock list
As you can see, you can select the ETF filter as well as others like exchange, volume, beta, etc. after this, you will be able to get the ETF data right on your spreadsheet.
Step 2 – Get the expense ratio for your list
Luckily instead of having to look online for the expense ratio of your stock list for every fund, you can use Wisesheets to simplify the process.
Using the =WISEFUNDS function, you can get the expense ratio among other valuable data like this:
=WISEFUNDS("spy", "expense ratio")
After setting up the function, you can drag it down so you can get the expense ratio of all the funds in your list like this:
Step 3 – Apply filters or conditional formatting
Once you have the data in your spreadsheet, you can apply filters so you can find the ETFs and or funds that have the lowest expense ratios.
Another useful way of finding these funds faster is to select the cells and apply conditional formatting rules where for example, if the expense ratio is lower than 1%, it will be highlighted in green.
Step 3 – Refresh the data
The best part about this method is that at any time, you can press the refresh button of the Wissheets add-on and get the latest expense ratios for your fund's list.
The same applies to any type of data you would like to add to your list via Wisesheets functions like beta, dividend yield, volume, etc.
How to add the expense ratio column to your spreadsheet?
Instead of building a whole ETF/Fund screener like shown above, you can get the expense ratio of most ETFs or funds individually. For this, you can use the =WISEFUNDS function like this:
=WISEFUNDS("spy", "expense ratio")
After you type in the function in any cell of your spreadsheet, you will get the expense ratio right away.
Tips for finding the right ETF with the best value based on expense ratio data
- Look for ETFs with a low expense ratio relative to their category or sector
- Compare expense ratios between large-cap and small-cap ETFs
- Consider the total cost of trading, including commissions, when selecting an ETF
- Pay attention to fees associated with funds, such as 12B-1 fees
- Consider the portfolio's turnover rate when evaluating expense ratios.
- Evaluate an ETF's performance relative to its benchmark and peer funds
- Consider the tax implications of certain ETFs and their holdings
- Choose ETFs with well-diversified portfolios or sector-specific funds for more targeted investments
- Ensure the ETF has liquidity and adequate volume for easy trading
The expense ratio is one of the most important factors to consider when selecting a fund or ETF. It can have a big impact on your overall return, so taking the time to do some research and find the right option with the best value is essential. By using the Wisesheets add-on, you can easily get this data on your spreadsheet and quickly find the ETFs or funds that have the lowest expense ratio. This way, you can make sure you are choosing the right investment with the best value.
Hope you found this guide useful and that it will help you make better investment decisions.