ETF costs are low compared with traditional funds, but they are not zero, and the headline figure does not tell the whole story. The TER is the cost everyone quotes, yet what you really pay also depends on your broker, the spread when you trade and how well the fund tracks its index. Over decades, small differences add up.
In short
- The TER is the yearly running cost, taken from the fund automatically.
- Tracking difference shows what the fund really cost compared with its index.
- Trading costs include broker fees, the bid-ask spread and currency conversion.
- For long-term investors, a low TER and a cheap broker matter far more than tiny spread differences.
TER: the running cost
The Total Expense Ratio (TER), also called the ongoing charge, is the yearly fee the fund company takes for running the ETF. You never pay it as a bill. It is deducted from the fund’s value day by day, so it is already included in the price you see.
Typical TERs for popular UCITS ETFs:
| ETF | Index | TER |
|---|---|---|
| Vanguard FTSE All-World (VWCE) | FTSE All-World | 0.14% |
| iShares Core MSCI World (IWDA) | MSCI World | 0.20% |
| iShares Core MSCI EM IMI (EIMI) | MSCI Emerging Markets IMI | 0.18% |
A TER of 0.20% means €2 a year for every €1,000 invested. Compare that with actively managed funds, which often charge 1.5% to 2% a year.
Tracking difference: the real cost
The TER is not the full picture. A fund also has trading costs inside it, pays taxes on dividends and may earn extra income by lending securities. The tracking difference is the gap between the fund’s return and its index’s return over a year. It captures all of these effects.
Some funds have a tracking difference smaller than their TER, because securities lending or efficient tax handling offsets part of the fee. Others do worse than their TER suggests. When two ETFs on the same index have similar TERs, the one with the better long-term tracking difference is usually the better buy. Fund comparison sites show it over several years.
Do not confuse it with tracking error, which measures how much the gap varies from day to day. For long-term investors, tracking difference is the figure that matters.
ETF costs when you trade
Broker fees
Each purchase or sale may cost a fixed fee, a percentage or both. Many European neobrokers now charge €0 to €1 per trade and offer free savings plans. See our broker comparison and the list of free ETF savings plans.
The spread
An ETF has two prices at any moment: the bid (the highest price buyers offer) and the ask (the lowest price sellers accept). The difference is the spread. For large ETFs on a main exchange, it is usually a few hundredths of a percent. It is wider for small funds, in the first and last minutes of the trading day, and when the underlying market is closed.
Two simple habits keep it low: trade during the main market hours, and use a limit order instead of a market order.
Currency conversion
If you buy an ETF quoted in dollars with an account in euros, your broker converts the money and may charge a fee. Most popular UCITS ETFs are listed on European exchanges in euros, so choose that listing when you can.
Why one percent matters so much
Suppose you invest €300 a month for 30 years and the market returns 7% a year before costs.
| Total yearly cost | Value after 30 years |
|---|---|
| 0.2% | about €340,000 |
| 1.0% | about €294,000 |
| 2.0% | about €246,000 |
The difference between a cheap ETF and an expensive fund can easily be €80,000 or more over a working life, without any difference in the underlying investments. You can test your own numbers with our compound interest calculator.
Which ETF costs to focus on
- Pick a low-TER ETF on a broad index.
- Use a broker with low or no fees for your monthly purchases.
- Buy the euro listing on a major exchange to avoid conversion costs.
- Do not switch funds to save 0.02%: switching costs and, in many countries, tax will eat the saving.
Sources
- Börse Express: Vanguard FTSE All-World TER cut to 0.14%
- Investor.gov (US SEC): Compounding interest
This article is for educational purposes only and is not financial or tax advice. Rules and prices change; check official sources or a qualified adviser before making decisions.