ETF essentials · 2 minute read
ETF costs: is the lowest TER always best?
The short answer
No. TER is the annual operating charge taken from an ETF, but it is only one part of the cost of investing. You should also consider trading costs, the bid–ask spread, platform charges and how closely the ETF has followed its index.
Why it matters
Costs reduce the return you receive. The impact may look small in one year, but it can become significant over a long period.
TER means total expense ratio. It is usually shown as a percentage of the money invested. A TER of 0.20% means that the fund’s stated annual operating costs are approximately €2 for every €1,000 invested. The charge reduces the fund’s value over time. It is not normally taken from your account as a separate bill.
TER does not usually include every cost you may face. Other costs can include:
- The commission charged by your investment platform
- The difference between the buying and selling price, known as the spread
- Currency-conversion charges
- Account or custody charges
- Costs incurred when the fund itself buys and sells investments
- The effect of buying or selling at an unfavourable time
A simple example
Suppose two similar ETFs have TERs of 0.15% and 0.30%. On €10,000, the stated difference is approximately €15 per year.
That difference matters, but it should not be considered in isolation. The ETF with the higher TER may have tracked its index more closely, or your platform may charge different dealing costs for each ETF.
What to check
- What is the TER or ongoing charge?
- What will your platform charge?
- How wide is the buying and selling spread?
- How closely has the ETF followed its index?
- Are there currency or custody charges?
Key term explained
Tracking difference is the gap between an ETF’s performance and the performance of the index it follows. It helps show what the investment delivered after the fund’s costs and other factors.
The KID cost section shows fund costs over stated holding periods, but it may not include your broker’s charges.
Tracking difference already reflects the combined effect of many fund costs and other factors. Do not add TER and tracking difference together as if they were separate charges.
The cheapest ETF is not automatically the best ETF. Look at the overall cost and the quality of the exposure you are receiving.