Expense ratio and holding cost, which is more accurate?

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vu8
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Expense ratio and holding cost, which is more accurate?

Post by vu8 » Wed Jul 04, 2018 4:45 pm

Take an example of VTI, vti has 0.04 expense ratio, but it's "total holding cost" on the performance page of vti in morningstar is only 0.01! For voo it's both 0.04! for VB it's -0.02! So which one is more accurate reflecting the actual cost of holding the ETF? Holding cost or the expense ratio?

mcraepat9
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Re: Expense ratio and holding cost, which is more accurate?

Post by mcraepat9 » Wed Jul 04, 2018 5:55 pm

vu8 wrote:
Wed Jul 04, 2018 4:45 pm
Take an example of VTI, vti has 0.04 expense ratio, but it's "total holding cost" on the performance page of vti in morningstar is only 0.01! For voo it's both 0.04! for VB it's -0.02! So which one is more accurate reflecting the actual cost of holding the ETF? Holding cost or the expense ratio?
Neither. Use triceratop's master spreadsheet - you should never use info from M* to evaluate costs, especially tax costs. viewtopic.php?t=242137
Amateur investors are not cool-headed logicians.

PFInterest
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Re: Expense ratio and holding cost, which is more accurate?

Post by PFInterest » Thu Jul 05, 2018 7:56 pm

vu8 wrote:
Wed Jul 04, 2018 4:45 pm
Take an example of VTI, vti has 0.04 expense ratio, but it's "total holding cost" on the performance page of vti in morningstar is only 0.01! For voo it's both 0.04! for VB it's -0.02! So which one is more accurate reflecting the actual cost of holding the ETF? Holding cost or the expense ratio?
you always pay the ER.
whether or not you pay more or less depends on taxes.

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jhfenton
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Re: Expense ratio and holding cost, which is more accurate?

Post by jhfenton » Thu Jul 05, 2018 8:58 pm

mcraepat9 wrote:
Wed Jul 04, 2018 5:55 pm
vu8 wrote:
Wed Jul 04, 2018 4:45 pm
Take an example of VTI, vti has 0.04 expense ratio, but it's "total holding cost" on the performance page of vti in morningstar is only 0.01! For voo it's both 0.04! for VB it's -0.02! So which one is more accurate reflecting the actual cost of holding the ETF? Holding cost or the expense ratio?
Neither. Use triceratop's master spreadsheet - you should never use info from M* to evaluate costs, especially tax costs. viewtopic.php?t=242137
You're introducing an important, but separate subject: tax efficiency.

M*'s Total Cost is an estimate of a fund's shortfall (tracking error) relative to the fund's index. In the case of VB, the fund is able to make enough in securities lending to more than offset its 5 bp expense ratio. Small stocks bring in more revenue in securities lending than large caps, so VTI is only able to make up 3 bp of its 4 bp ER.

I would look at both ER and Total Cost in comparing funds. The ER is guaranteed. The Total Cost is not. But Total Cost can reveal both poor index tracking and things like securities lending revenue that reduce the real cost of a fund.

You should also consider tax efficiency if you're considering buying a fund in taxable. M*'s tax cost numbers are mostly useless. Triceratop's spreadsheet linked above is a great tool.

AlohaJoe
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Re: Expense ratio and holding cost, which is more accurate?

Post by AlohaJoe » Thu Jul 05, 2018 9:06 pm

PFInterest wrote:
Thu Jul 05, 2018 7:56 pm
vu8 wrote:
Wed Jul 04, 2018 4:45 pm
Take an example of VTI, vti has 0.04 expense ratio, but it's "total holding cost" on the performance page of vti in morningstar is only 0.01! For voo it's both 0.04! for VB it's -0.02! So which one is more accurate reflecting the actual cost of holding the ETF? Holding cost or the expense ratio?
you always pay the ER.
whether or not you pay more or less depends on taxes.
This isn't really complete, as Morningstar's explanation of "estimated holding cost" makes clear. It also depends on securities lending, on swap contract spreads, on their sampling methodology (if they don't do full index replication), on ability to avoid front running of index changes, on manager ability to manage redemptions, and so on.

To the OP's question: Holding cost is more accurate but it is just an estimate. Also, once you're talking about a handful of basis points, I wouldn't let that drive my decision.

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triceratop
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Re: Expense ratio and holding cost, which is more accurate?

Post by triceratop » Thu Jul 05, 2018 9:10 pm

As mentioned above, the "Total Cost" in my spreadsheet is not really "Total Cost" in the sense meant by Morningstar. I would characterize total cost as the sum of the negative part of tracking error and tax cost. However, I use expense ratio as an approximate metric for tracking error, because I really don't care to go look up tracking error for the previous year.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

mcraepat9
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Re: Expense ratio and holding cost, which is more accurate?

Post by mcraepat9 » Sun Jul 08, 2018 1:28 pm

This is helpful information - i have always ignored that number in the past. I don't plan on looking at that number going forward either.
Amateur investors are not cool-headed logicians.

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