Compounding: your best friend when it’s working in your favour, and your worst enemy when it comes to fees. It’s always helpful to visualise an investment journey over a lifetime, so we have built a free ETF investment return calculator to help do just that.
You can also use this as a compound interest calculator to visualise your savings growth, and as a tool to compared the effect of fees on your returns.
Initial Investment: This is your first deposit – the money you fund your account with. This can be as little as £1 depending on the platform you use.
Platform Fees: These are usually annual percentages or a fixed monthly charge – sometimes both. Here are the current fees at some of the UK’s popular platforms for ETFs and shares within an ISA:
- AJ Bell: 0.25%, capped at £3.50 per month
- Interactive Investor: £4.99, £11.99 or £19.99 per month (flat)
- FreeTrade: £0, £5.99 (ISA) or £11.99 (SIPP) per month (flat)
- Hargreaves Lansdown: 0.45% (capped at £45 per year, so it’s effectively fixed for accounts over £10,000)
- Fidelity: 0.35%, capped at £90 per year.
- Vanguard: 0.15%, capped at £375 per year
ETF Fee (OCR): This is the fee charged by the fund manager (think Vanguard, BlackRock). See below for a typical average fee for a simple portfolio.
Annual Return: Average return over the whole period. As a reference, the Vanguard FTSE All-World UCITS ETF has returned 8.42% annually over the last 20 years. A classic 60/40 portfolio of global equities and global bonds has returned 7.28% annually. Past performance is a guide only and not indicative of future returns.
Trading Fee (Commission): This is the fee some platforms charge for buying and selling stocks and ETFs. Many platforms are commission free, and those that are not often waive the commission if you implement automatic monthly investing. Typical commissions range from zero at Freetrade, to £11.95 at Hargreaves Lansdown with free auto invest.
For more detail on this graph, see our Hargreaves Lansdown review and find out why it’s one of the UK’s lowest cost platforms for ETF investors.
How much to invest each month?
Knowing how much you will need for retirement is a tricky problem, but there are resources available that help you get an idea based on where you live and what your expectations are. Using the calculator, set your returns and fees and then play with the monthly contribution slider. This should give you an idea of what you need to be aiming for each month to achieve your goal.
Your monthly contribution is the most powerful element in the ETF investment return calculator – not the investment return. Why? Because it is in your control, whereas returns are at the whim of the market. As tempting as it is to crank up the returns until you see your target hit, it may mean you have to take on dangerous levels of risk to get there.
Be conservative with your returns expectations. Ending up with more money at the end is a lot nicer than falling short.
Platform and Fund Fees
The fees you pay along the way are more noticeable the longer your time horizon. Percentage-based fees build over time – 0.45% over one year may seem small, but as your pot grows so does the fee. Any money paid to a platform is money that is not compounding along with the rest of your investments.
Flat fees are attractive when you have a larger account but can be oversized when you’re starting out. If you are investing £200 a month and paying £5 a month in platform charges, that’s equivalent to a whopping 2.5% fee.
Have a play around and compare the different options. Look closely at the final figure and you can see the effect of fees on your long term wealth. Make sure you are happy with the value you receive from costlier options. For more on fees, see our in depth article on the effect fees can have on wealth over the long term.
ETF Fees and OCR (Ongoing Cost Ratio)
This is the fee charged by the ETF or fund provider for managing the fund. It is inescapable and will be the same regardless of which platform you hold your ETF with. For broad ETFs that track a major index like the FTSE or the S&P 500, the OCR will typically be around the 0.07% mark. For global equity ETFs, it’ll be about 0.20%. For more exotic, niche areas of interest, the fee will be a bit higher. Passive ETFs are generally lower cost than their actively managed counterparts.
Commissions and Trading Charges
Another fee that can have a surprising impact over the long term. Some platforms don’t charge a commission, others will waive theirs if you set up an automatic monthly investment. If available, this is always worth it. Not only does it automate one of the most important habits of successful long-term investors, it will save you a big chunk of money.
Example: over 30 years at 7% return, and trading just once per month, it will cost you about £14,000 extra through Hargreaves Lansdown in commission and lost compounding vs commission-free investing.
Soon to be released: along with this free ETF investment return calculator, over the next few weeks we will be releasing various other tools to help you plan your investment journey. Coming up will be a portfolio rebalancing tool and a tool to help visualise the long term effect of platform and fund fees. Somewhere down the road we will hopefully release an ETF screener and portfolio construction tool. Watch this space!
