weighted expense ratio calculation?

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BooneDocks11
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weighted expense ratio calculation?

Post by BooneDocks11 »

Is there a simple way to calculate weighted expense ratios of a portfolio?

For example, if one wanted to compare a target retirement fund with an expense ratio of 0.46% and a portfolio with:

25% fund A (0.06%)
51% fund B(0.02%)
15% fund C(0.03%)
9% fund D (0.04%)
TxInjun
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Re: weighted expense ratio calculation?

Post by TxInjun »

BooneDocks11 wrote: Sat Aug 01, 2020 3:55 pm Is there a simple way to calculate weighted expense ratios of a portfolio?

For example, if one wanted to compare a target retirement fund with an expense ratio of 0.46% and a portfolio with:

25% fund A (0.06%)
51% fund B(0.02%)
15% fund C(0.03%)
9% fund D (0.04%)
25% can also be written as 0.25

You can calculate the weighted average as: 0.25*0.06 + 0.51*0.02 + 0.15*0.03 + 0.09*0.04

Since all the expense ratios are between 0.02% and 0.06%, the weighted average will also be between those numbers: so definitely much lower than your target date fund’s expense ratio of 0.46%

Best,

TxIn
Silk McCue
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Re: weighted expense ratio calculation?

Post by Silk McCue »

Sum the products of each fund percentage times their respective ER.

(.25 * .06) + (.51 * .02) + (.15 * .03) + (.09 * .04) = .0333%

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BooneDocks11
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Re: weighted expense ratio calculation?

Post by BooneDocks11 »

Thanks!! :sharebeer
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Rob Relyea
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Re: weighted expense ratio calculation?

Post by Rob Relyea »

I've just added weighted expense ratio calculation to bogle.tools/portfolio - a tool to help people compose Portfolio Review posts. (forum thread about bogle.tools/portfolio)

You can try it out with a sample portfolio here: https://bogle.tools/portfolio/topic/400371 (this is the portfolio from post topic #400371 - a portfolio I made $10K, since there were no amounts)

Above the "current retirement assets", it will show:
Weighted Expense Ratio: 0.041% or $3.96 per year

If you want to try it out with your own portfolio, navigate to http://bogle.tools/portfolio (or press Clear Portfolio button if you are using the sample portfolio). Once you navigate to https://bogle.tools/portfolio/retirement-assets - you can hand enter your accounts/investments...or you can import many different Custodians CSV file formats.
Last edited by Rob Relyea on Tue Mar 21, 2023 5:01 pm, edited 1 time in total.
jebmke
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Re: weighted expense ratio calculation?

Post by jebmke »

Mine shows up in Portfolio Watch. I have no idea if it is accurate but it looks right.
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
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Rob Relyea
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Re: weighted expense ratio calculation?

Post by Rob Relyea »

jebmke wrote: Tue Mar 21, 2023 3:28 pm Mine shows up in Portfolio Watch. I have no idea if it is accurate but it looks right.
That is good to hear, thanks.
I'm trying to put it into the flow for portfolio reviews...and make it easy to calculate and collect that data.

[update]:
I actually decided to add the feature because I see it is one of the inputs of FireCalc.com on the your portfolio page -- would be nice to make it easier to calculate the inputs needed for firecalc.
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nisiprius
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Re: weighted expense ratio calculation?

Post by nisiprius »

BooneDocks11 wrote: Sat Aug 01, 2020 3:55 pm Is there a simple way to calculate weighted expense ratios of a portfolio?

For example, if one wanted to compare a target retirement fund with an expense ratio of 0.46% and a portfolio with:

25% fund A (0.06%)
51% fund B(0.02%)
15% fund C(0.03%)
9% fund D (0.04%)
Yes. To add to what others have mentioned. The key is to convert the costs to dollars, then add them up and convert them back to a percentage. This is just a way of computing a weighted average, but it makes it easier to see why it is correct. And since the size of the portfolio doesn't actually matter, you can use a round number like $100,000 if you like.

In your example, you have $25,000, $51,000, $15,000 and $9,000 in the four funds respectively.

So the dollar expenses for each holding are:
0.06% of $25,000 = $15.00
0.02% of $51,000 = $10.20
0.03% of $15,000 = $4.50
0.04% 0f $9,000 = $3.60

Total expenses are $15.00 + $10.20 + $4.50 + $3.60 = $33.30
Total holdings are $100,000
Overall expense ratio of the portfolio = expenses / portfolio size = $33.30 / 100,000 = 0.333%
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
Silk McCue
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Re: weighted expense ratio calculation?

Post by Silk McCue »

nisiprius wrote: Tue Mar 21, 2023 4:14 pm
BooneDocks11 wrote: Sat Aug 01, 2020 3:55 pm Is there a simple way to calculate weighted expense ratios of a portfolio?

For example, if one wanted to compare a target retirement fund with an expense ratio of 0.46% and a portfolio with:

25% fund A (0.06%)
51% fund B(0.02%)
15% fund C(0.03%)
9% fund D (0.04%)
Yes. To add to what others have mentioned. The key is to convert the costs to dollars, then add them up and convert them back to a percentage. This is just a way of computing a weighted average, but it makes it easier to see why it is correct. And since the size of the portfolio doesn't actually matter, you can use a round number like $100,000 if you like.

In your example, you have $25,000, $51,000, $15,000 and $9,000 in the four funds respectively.

So the dollar expenses for each holding are:
0.06% of $25,000 = $15.00
0.02% of $51,000 = $10.20
0.03% of $15,000 = $4.50
0.04% 0f $9,000 = $3.60

Total expenses are $15.00 + $10.20 + $4.50 + $3.60 = $33.30
Total holdings are $100,000
Overall expense ratio of the portfolio = expenses / portfolio size = $33.30 / 100,000 = 0.333%
The original post was answered two years ago. Rob Relyea posted today with a reference to a tool to perform this calculation that woke this thread up.

ALSO - your math is off - it’s .0333%

I posted that above when the thread was fresh.

viewtopic.php?p=5407651#p5407651

Cheers
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retired@50
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Re: weighted expense ratio calculation?

Post by retired@50 »

jebmke wrote: Tue Mar 21, 2023 3:28 pm Mine shows up in Portfolio Watch. I have no idea if it is accurate but it looks right.
I calculate my weighted average in a spreadsheet, and it matches portfolio watch, at least it does when rounded to the nearest hundredth.

My spreadsheet says 0.0685% and Vanguard portfolio watch says 0.07% - close enough for me.

Regards,
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