Understanding ETF Fees: MER, ICR, and Total Costs Explained

Fees are one of the few things in investing that you can control. Understanding how ETF fees work, what they include, and how they impact your returns is essential for making informed investment decisions. In this guide, we'll break down everything you need to know about ETF fees.

Why Fees Matter

Fees might seem small, but they compound over time and can significantly erode your returns. A difference of just 0.5% in annual fees can cost you tens of thousands of dollars over a 30-year investment period.

The principle is simple: every dollar paid in fees is a dollar not working for you. Lower fees mean more of your money stays invested and compounds over time.

Understanding MER (Management Expense Ratio)

The Management Expense Ratio (MER) is the most commonly quoted fee for ETFs. It represents the total annual cost of managing the fund, expressed as a percentage of your investment.

MER typically includes:

• Management fees: Paid to the fund manager
• Administration costs: Operational expenses
• Custody fees: Costs of holding assets
• Other operational expenses: Various administrative costs

For example, if an ETF has an MER of 0.10%, and you invest $10,000, you'll pay approximately $10 per year in fees.

Understanding ICR (Indirect Cost Ratio)

The Indirect Cost Ratio (ICR) represents additional costs that aren't included in the MER, such as:

• Trading costs: Buying and selling underlying securities
• Tax costs: Tax-related expenses
• Other indirect costs: Various operational expenses

ICR is typically much smaller than MER and is often included in the total cost figure. Some ETFs quote MER and ICR separately, while others provide a combined figure.

Current Fee Landscape

The average management fee across all Australian ETFs is 0.53% per annum.

Understanding the average fee helps you determine whether a particular ETF's fee is competitive. Generally, broad market index ETFs have lower fees than specialised or actively managed products.

Fee Impact Calculator

Let's look at how fees impact returns over time using real examples:

Fee Impact Examples

Example 1: Low Fee ETF (MQAE - 0.03%)

• Initial investment: $100,000
• Value after 10 years (7% return): $196164.29
• Total fees paid: $550.84

Example 2: Higher Fee ETF (LEVR - 2.38%)

• Initial investment: $100,000
• Value after 10 years (7% return): $157089.50
• Total fees paid: $39625.64

Difference: $39074.79 more in fees over 10 years.

These examples demonstrate how even small differences in fees compound significantly over time. The key takeaway: lower fees generally mean higher returns, all else being equal.

Average Fees by Provider

Different ETF providers have different fee structures:

Provider	Average Fee
The Perth Mint	0.15%
StateStreet	0.20%
Vanguard	0.24%
ETF Shares	0.26%
iShares	0.26%
PIMCO	0.29%
Global x	0.32%
DFA	0.36%
Morningstar	0.39%
JPMAM / Perpetual	0.42%

Some providers, like Vanguard and iShares, are known for their low-cost index funds, while others may charge higher fees for specialised strategies or active management.

Fee Distribution

Fee Distribution Statistics:

• Minimum Fee: 0.03%
• Maximum Fee: 2.38%
• Average Fee: 0.53%
• Median Fee: 0.45%

These statistics help you understand the range of fees in the market and where a particular ETF sits relative to others.

Lowest Fee ETFs by Category

Different ETF categories have different typical fee ranges:

Lowest Fee ETFs

ETF	Name	Fee	Category
MQAE	Macquarie Core Australian Equity Active ETF	0.03%	N/A
VTS	Vanguard US Total Market Shares Index ETF	0.03%	CRSP US Total Market Index
A200	Betashares Australia 200 ETF	0.04%	n/a
A300	Global X Australia 300 ETF	0.04%	n/a
IVV	iShares S&P 500 ETF	0.04%	S&P 500 Index
VEU	Vanguard All-World ex US Shares Index ETF	0.04%	FTSE All-World ex US Index
E200	SPDR S&P/ASX 200 ESG ETF	0.05%	N/A
IOZ	iShares Core S&P/ASX 200 ETF	0.05%	S&P/ASX 200 Index
STW	SPDR S&P/ASX 200 ETF	0.05%	N/A
BILL	iShares Core Cash ETF	0.07%	N/A

Understanding typical fees for different categories helps you set realistic expectations and identify outliers.

How Fees Have Changed

The Australian ETF market has become increasingly competitive, with fees generally trending downward over the past decade. This is great news for investors, as lower fees mean more of your money stays invested.

Factors driving fee reductions include:

• Increased competition among providers
• Growing FUM allowing economies of scale
• Investor demand for lower-cost options
• Regulatory focus on fee transparency

Reading Fee Information

When researching ETFs, you'll find fee information in several places:

1. Product Disclosure Statement (PDS): The most comprehensive source
2. Factsheets: Usually include MER and sometimes ICR
3. Provider Websites: Often show current fees
4. Our Website: We display management fees for all ETFs

Always read the PDS for complete fee information, including any additional costs that might apply.

Fee Comparison Tips

When comparing ETF fees:

1. Compare Like with Like: Compare similar products (e.g., Australian share ETFs with other Australian share ETFs)
2. Look at Total Costs: Consider MER, ICR, and any other costs
3. Consider Value: Sometimes higher fees are justified by the strategy or features
4. Think Long-Term: Small fee differences compound significantly over time
5. Check for Fee Changes: Fees can change, so verify current fees before investing

The Fee-Performance Relationship

It's important to understand that fees and performance are related but separate:

• Fees are certain: You'll pay them regardless of performance
• Performance is uncertain: Past performance doesn't guarantee future results
• Lower fees = Higher net returns: All else being equal, lower fees mean higher returns

This is why many investors prioritise low fees, especially for broad market index ETFs where performance should closely track the underlying index.

Conclusion

Understanding ETF fees is essential for making informed investment decisions. While fees might seem small, they compound significantly over time and can have a major impact on your long-term returns.

When evaluating ETF fees:

• Understand what MER and ICR include
• Compare fees across similar products
• Consider the long-term impact of fees
• Read the PDS for complete fee information
• Remember that lower fees generally mean higher returns

For detailed fee information on specific ETFs, visit their individual pages on our website, where you can see current management fees, compare with similar products, and access links to PDS documents.

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