Basis Point Basics
Decoding the industry jargon used to report financial performance and data can help you better understand your personal investments.
For instance, you might hear a member of our Investments team use the term “basis point” when describing the performance of our investment funds. A basis point is a unit of measurement equal to 1/100th of one percent, which can be written out as “0.01%.”
This measurement is typically used to denote the percentage change of a value or index (i.e. “The Federal Reserve cut interest rates by 50 basis points in March.”) It may seem like a small figure, but it can have a noticeable impact!
What is a Basis Point?
- Basis points are also known as “bps” or “bips”
- 100 basis points is equal to 1.00%
- Fractional basis points can be useful in describing even more precise changes—1.5 basis points is 0.015%, 25 basis points is 0.25% and so on.
- Basis points are also used to measure fees associated with an investment. For example, in 2018 Wespath’s International Equity Fund (IEF) had an expense ratio of 0.74%, or 74 basis points. This means that the fund retained $7.40 per $1,000 invested.
- By contrast, the American Funds International Growth and Income Fund, a popular international equity fund with over $17 billion in assets, has an expense ratio of 93 basis points, or $9.30 per $1,000 invested—an annual difference of +$1.90 compared to IEF.