Expense ratio (TER)

The expense ratio covers a fund’s recurring operating costs: the management fee plus administration, custody, audit, legal and index licensing costs. It is quoted as an annual percentage but taken in small amounts, usually daily, from the fund’s assets, so you never see a bill; it simply reduces the fund’s price and your return. In Europe it is also called the total expense ratio or ongoing charges figure, and EU key information documents show it as ongoing costs within a wider cost breakdown. It usually excludes the fund’s own trading costs and any platform, broker or adviser fees you pay separately.

Because costs are certain while returns are not, the expense ratio is one of the more reliable predictors of how a fund will do relative to similar funds. Small differences compound: a fund charging one percentage point more a year gives up a large slice of long-term growth. But the expense ratio is not the whole cost. Trading costs inside the fund, bid-ask spreads, platform fees and, for index funds, the tracking difference against the index all matter. A low stated charge with a poor tracking record can cost more than a slightly higher one that tracks well.