Michael Iachini, managing director of ETF research for Charles Schwab Investment Advisory Inc., though, has offered a simple formula to convert expense ratios, bid-ask spreads and commission fees to a single per-year percentage expense:

  • First off, the expense ratio remains as a percentage.
  • The per-year, bid-ask spread percentage is calculated by dividing the current spread with the holding period. For instance, if an investor holds a fund for half a year, the spread is divided by 0.5, and if the fund is held for 2 years, divide by 2.
  • Lastly, the commission is taken out whenever you buy or sell a fund, unless the brokerage offers commission free trades. The commission per-year percentage conversion is taken by multiplying the commission fee by 2, divided by the total dollar amount invested and then multiplying by 100.
  • ETF investors can then add up the three numbers to calculate the total annual cost in percent terms.

Since the calculations are based on a time component, the total cost for long-term holders will inevitably be lower than for short-term traders.

Additionally, potential investors should be aware of other implicit costs, like premiums or discounts to underlying holdings, that may hurt or help performance. [Read More: Premiums and Discounts]

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