Unit 4 · Level 2 · Costs & taxes
The fee iceberg
Every fund publishes a TER (total expense ratio) like 0.2% or 1.8% a year. That's the tip of the iceberg. Below the waterline: the bid-ask spread you pay on every purchase, the trading costs the fund racks up internally when it churns its own holdings, and whatever your broker or platform charges on top. A fund with a 'cheap' TER can still be an expensive habit.
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What you get asked
What does a fund's TER really cover?
TER bundles management and admin costs, which is useful but incomplete. Spreads, internal turnover costs, and platform fees all live below the waterline.
Match each cost to where it hides
Four leaks, one bucket. Only the first is printed in bold; the other three you find by reading fact sheets and your broker's pricing page.
A fund that trades its holdings frequently racks up hidden ___ costs that never appear in the TER.
Every internal trade pays spreads and moves prices against the fund. High-turnover active funds can quietly spend more below the waterline than the TER shows above it.
A broad index fund charges around 0.15%; a typical active fund charges around 1.8%. Why does that gap matter so much?
Fees come off the whole balance annually, in good years and bad, forever. A recurring 1.65% toll on everything you own is one of the biggest levers in investing.
Comparing two similar global index funds, what's the sensible first check?
For index funds tracking the same index, cost and tracking quality ARE the product. Everything else is marketing, and marketing is a cost too. Guess who pays it. 🐜
The rest of this unit
Fees, frictions, and tax drag: the leaks you can control.