Last month, my colleague Abraham Bailin wrote an article titled "The Intangible Costs of ETF Ownership," which explained the concept behind Morningstar's proprietary cost data points. (The data points can be found under the Performance tab.) In this article, we will discuss how to use these data points when comparing funds within a category.
First, a quick review of the data points and their definitions. Estimated holding cost reflects how much a fund's NAV has lagged its index over the last year. This can be considered the fund's "cost" to replicate its underlying index. The largest component of this figure is usually the fund's expense ratio, but other contributors may include high turnover (which drives higher trading expenses), higher expenses due to exposure to less-liquid securities (such as small caps or high-yield bonds), sampling (which can result in positive or negative alpha), and share lending (which is a source of revenue and therefore offsets other costs). EHCs are calculated as the geometric difference between the index return and the fund return over the past year.
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Patricia Oey does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.