A TER (Total Expense Ratio) is the annual fee an ETF charges for running the fund. It is expressed as a percentage of your investment. A TER of 0.20% means you pay £2 per year for every £1,000 invested. Most broad index ETFs charge between 0.05% and 0.50% per year.
What is a TER?
Every ETF charges an annual fee called the TER. This covers the cost of running the fund: buying and selling investments, administration, regulatory compliance, and the fund manager's profit.
You never actually see this charge deducted from your account. Instead, it's taken from the fund's value daily in tiny increments. It's already reflected in the ETF's price.
What counts as "low cost"?
For a broad, passive ETF tracking a major index:
- 0.05-0.15%: Very cheap. Global or US equity index funds from major providers
- 0.15-0.30%: Reasonable. Most mainstream ETFs fall in this range
- 0.30-0.50%: Moderate. Common for ethical, thematic, or niche funds
- 0.50%+: Expensive for a passive fund. Worth questioning whether it's justified
For context, traditional actively managed funds in the UK often charge 0.75-1.5% per year. ETFs are dramatically cheaper.
How much do ETF fees cost me over time?
A 0.5% fee difference might not sound like much, but it compounds over time. Here's what happens to a £10,000 investment over 30 years at 7% annual growth:
- At 0.10% TER: You end up with £74,017
- At 0.50% TER: You end up with £66,144
- At 1.00% TER: You end up with £57,435
The difference between 0.10% and 1.00% is nearly £17,000 on a £10,000 investment. That's money that went to the fund manager instead of staying in your pocket.
What other investment fees do I pay?
The TER isn't the only cost of investing. Your platform may also charge:
- Platform fee: An annual percentage or flat fee for holding investments. Some platforms (like Trading 212 and InvestEngine) charge nothing; others (like Hargreaves Lansdown) charge 0.25-0.45%
- Transaction fee: A charge each time you buy or sell. Again, some platforms offer commission-free trading
- Foreign exchange fee: If you buy an ETF denominated in USD or EUR, your platform may charge 0.15-0.5% to convert your pounds
For small portfolios (under £20,000), platforms with flat fees or no fees tend to be cheapest. For larger portfolios, the percentage-based fees add up quickly.
The bottom line
Fees matter, but they are not the only thing that matters. If two ETFs track the same index and one costs more, pick the cheaper one. If a slightly more expensive ETF is a better fit for your goals, the extra cost may be worthwhile. For a broad global index fund, anything under 0.25% per year is a reasonable fee.