ETF v praxi
Total ETF Costs: What You Actually Pay Beyond the TER
Key takeaways
- TER (Total Expense Ratio) covers the fund manager's fees but not transaction costs or the spread.
- The spread — the difference between the buy and sell price — is a cost you pay on every purchase and every sale.
- An Irish domicile reduces the withholding tax on US dividends at fund level from 30% to 15%.
- Tracking difference (deviation from the index) can be lower than the TER or even exceed it — it depends on securities lending.
- True annual cost = TER + spread (amortised over the holding period) + tracking difference.
The total cost of an ETF is not the same as the TER — the true price you pay includes the spread, dividend taxation at fund level, and the deviation from the tracked index. Only the sum of all these components tells you what the investment actually costs.
What TER Is — and What It Leaves Out
TER (Total Expense Ratio) is the annual fee the fund charges for management, custody, and administration. It is deducted continuously from the fund's NAV. You do not pay it as an invoice — you simply notice that the fund grows slightly less than the index. But TER does not include:
- Spread — the difference between the Ask (buy) and Bid (sell) price. For a large UCITS ETF this is typically 0.01–0.05%. For a small or illiquid fund it can be 0.3%.
- Broker execution fee — depends on the broker, not the fund.
- Dividend tax at fund level — the fund holds shares, receives dividends, and pays withholding tax.
Dividend Tax Inside the Fund
This is a less visible but important cost. US equities pay dividends and the US withholding tax rate is normally 30%. An Irish UCITS fund benefits from the tax treaty between Ireland and the US and pays 15%. A fund domiciled in Luxembourg pays 30%. Over the long run, this difference can cause a performance gap of tenths of a percent per year. Why domicile matters is explained in the article why an Irish-domicile UCITS ETF.
How to Add Up the Costs Correctly
A simple formula for the long-term investor: Annual cost = tracking difference + spread / number of years held. You amortise the spread over the entire investment period — with a ten-year horizon a 0.1% spread is just 0.01% per year. TER then becomes less important than tracking difference.
Practical Impact When Choosing a Fund
Two funds tracking the same index may have the same TER of 0.07% but different tracking differences — one +0.02%, the other −0.05%. The second fund in effect "earns" on securities lending more than its management costs. Comparing only the TER is not enough. When browsing the ETF database, always start with tracking difference, then TER and spread.
FAQ
What is TER for an ETF?
TER (Total Expense Ratio) is the annual percentage fee that the fund deducts from its asset value for management, custody, and administration. It is reflected in lower performance compared with the underlying index, but you do not pay it separately as an invoice.
What is tracking difference and why is it more important than TER?
Tracking difference is the actual annual deviation of the fund's performance from the index. It can be lower than the TER — the fund earns money by lending out securities. It is a more accurate measure of true cost than TER alone.
Why does the ETF domicile matter (Ireland vs. Luxembourg)?
An Irish UCITS fund pays only 15% withholding tax on US dividends thanks to the tax treaty with the US. A Luxembourg fund pays 30%. This difference reduces the actual cost of the Irish fund by tens of basis points per year.
How do you calculate total ETF costs?
Annual cost = tracking difference + spread divided by the number of years of planned holding. You amortise the spread over the entire investment period — over a ten-year horizon the impact of the spread is minimal.