Total cost of ownership definition
Total cost of ownership (TCO) is a measure of the cost of investing in an exchange traded fund (ETF) over a period of time. It is viewed by some ETF providers as a more comprehensive indicator of an ETF’s cost than its total expense ratio (TER).
This is because TCO will also examine internal factors which relate to the cost of holding the ETF which TER will not. These factors can include:
- rebalancing costs
- withholding taxes
- any additional revenue streams (such as from securities lending)
As well as these internal factors, TCO also considers external factors in its calculation such as trading spread, creation and redemption costs, and brokerage fees.
TCO can be quite difficult to calculate, especially the external costs which can vary significantly. An alternative way of calculating TCO is by combining the 12-month tracking difference of an ETF with the costs of buying the ETF itself.
This will show an investor how much their ETF has underperformed its benchmark in the past 12 months, whilst also considering trading costs. By looking at this figure, an investor should be able to get a more accurate understanding of the costs which will have been paid.