What is Total Expense Ratio (TER)?

The TER or Total Expense Ratio represents the annual fees you pay the ETF issuer to operate the ETF.

To properly manage an ETF, an issuer needs to pay lawyers, auditors, index licensing fees, custody fees, exchange listing fees and other costs associated with the day-to-day running of the fund such as staff, office rental and marketing and PR.

These running costs are passed onto the investor in the form of TER, which indicates the fees payable per year to the issuer. The TER can be shown as a percentage e.g. 0.10%, or in basis points e.g. 10bps.

For instance, if you invest $25,000 in an ETF with an annual TER of 0.10%, you’d pay $25 a year to the issuer to cover their operational and business costs.

In general, issuers with many ETFs will be able to leverage efficiencies of scale which help them to keep the costs down and the TER can be an indicator of the operational efficiency of the issuer – a lean operation would normally deliver lower costs.

It’s important to note that these fees will eat into your investment performance, and the performance you may see on fund marketing materials and factsheets might not include the impact of fees. Returns that do not consider the impact of fees and costs are called “gross return”, and the return that does is called “net return”.

For example, if an ETF had delivered 4.5% gross return per year, but had a TER of 1%, your effective net return would be closer to 3.5%.

There are also other costs that you as an investor will face when buying and selling ETFs that are not captured in the TER such as brokerage fees and taxes. These will vary from person to person depending on their circumstances and where they’re based, so it’s worth discussing with your financial advisor or broker if you have any questions about the impact of these additional fees.

Now paying fees is never fun, but ETF investors can take comfort knowing that they are normally paying far less for than they would do if they bought a mutual fund with the same exposure. The average TER has also been falling and some ETFs charge as little as 0.07% per year. The tools available on Trackinsight can help you compare different ETFs and find the one that’s most cost effective.