What is the TER (total expense ratio)?

The total expense ratio (TER) is the yearly cost of running a fund, expressed as a percentage of its assets. It covers the management fee and most other ongoing costs: administration, custody, index licences, audits and legal costs. It is not charged as a separate bill: it is taken from the fund's assets a little every day, so it shows up as a slightly lower return.

In the EU, funds report their running costs as ongoing costs in the key information document.

The formula

\text{TER} = \frac{\text{Total ongoing costs of the fund over a year}}{\text{Average fund assets over the year}}

What it includes and what it leaves out

Included: the management fee, administration and custody, index licensing, audits, regulatory and legal costs.

Not included:

transaction costs inside the fund, when it buys and sells securities,
the investor's own trading costs: broker fees and the bid-ask spread,
income from securities lending, which can partly offset the costs,
tax effects, such as withholding tax on dividends inside the fund.

That is why the TER alone does not fully explain a fund's return compared with its index. The tracking difference captures all of it.

What costs add up to

Costs compound just as returns do. With a gross return $r$ and yearly costs $c$ , the value after $n$ years is approximately:

V_n = V_0 \, (1 + r - c)^n

A simple illustration

€10,000 is invested for 30 years at a gross return of 7% a year. Without costs it would grow to €76,123:

TER	Value after 30 years	Lost to costs
0.2%	€71,958	€4,165
0.5%	€66,144	€9,979
1.5%	€49,840	€26,283

The same investment and the same gross return. The only difference is the fee.

A difference of 1.3 points a year — typical of the gap between an actively managed fund and an index ETF — reduces the final value by almost a third after 30 years.

How to read it

Broad index ETFs typically have TERs between 0.05% and 0.3%; actively managed equity funds often charge 1–2%.
Small differences matter less than they look between cheap funds: 0.12% against 0.20% is €8 a year per €10,000 invested.
Large differences matter more than they look, because the gap compounds over decades.
Compare like with like. A slightly more expensive fund that tracks a broader or better index can still be the better choice.

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