What the TER does and does not include
The total expense ratio, or TER, is the cost figure most often quoted for a fund in factsheets, comparison tables and advertisements. It is a useful number, but it is not the total cost of owning a fund. This explainer sets out what the TER includes, what it leaves out, where the remaining costs appear, and how to put the full picture together before you invest.
What the TER measures
The TER expresses the cost of running a fund as a percentage of the money in it.
How the TER is calculated
TER = total operating costs charged to the fund over a period, usually its last financial year ÷ the fund's average net assets over the same period.
A TER of 0.80% means that, over the year, operating costs took 0.80% of the fund's average value.
Four points follow from the definition:
- It looks backwards. A TER reports what running the fund cost in a past period. Next year's figure can differ.
- You never see an invoice. The costs are deducted from the fund's assets a little each day, and the fund's published performance is already net of them.
- It belongs to a share class. Different share classes of the same fund can have quite different TERs, mainly because of what is paid to distributors.
- The name varies. You will also see "ongoing charges", the term used in the old UCITS document, and "management fees and other administrative or operating costs", the line used in today's Key Information Document. They belong to the same family of costs, but the definitions differ in detail, so compare like with like.
What the TER includes
The TER covers the recurring costs of operating the fund:
- the management fee paid to the manager, part of which may be passed on to distributors as a trail commission (sometimes called a retrocession);
- administration, fund accounting and transfer agency, which keeps the register of investors;
- depositary and custody fees for safekeeping the assets and overseeing the fund;
- audit, legal, regulatory and registration fees;
- index licence fees for funds that track an index;
- other operating costs, such as directors' fees and publication costs;
- for a fund that invests in other funds, the costs of those underlying funds, when a combined ("synthetic") figure is reported. Check that it is, or the true cost is understated.
What the TER leaves out
Several costs, some of them substantial, sit outside the TER:
| Cost | What it is | Where to find it |
|---|---|---|
| Transaction costs | Commissions, taxes such as stamp duty or financial transaction taxes, bid–ask spreads and the market impact of the fund's own trading. | KID ("Transaction costs"); annual report |
| Entry and exit charges | One-off fees when you invest or sell, as a percentage of the amount. | KID (as maximums); your distributor may charge less |
| Performance fees | A share of returns above a hurdle or benchmark. | KID; prospectus for the exact mechanism |
| Carried interest | In private equity and similar funds, a share of profits paid to the manager once investors have received their capital and a preferred return. | KID; fund documents |
| Dilution adjustments | Swing pricing or dilution levies that make investors who buy or sell bear the trading costs they cause. | Prospectus |
| Securities lending fees | Where a fund lends securities, the lending agent's share of the revenue reduces what the fund earns. | Annual report |
| Service costs | Platform, custody account, advice and currency conversion fees charged by your bank, broker or adviser. | Your provider's cost disclosure |
| Your own taxes | Tax you pay personally on income and gains. | Your own tax position |
Transaction costs deserve particular attention. For an index fund they are usually small. For a fund that trades actively, or invests in less liquid markets, they can add several tenths of a percentage point a year, and sometimes more.
Where the full cost picture appears
The Key Information Document
The KID shows the product's costs in two tables. One gives the total costs in euros and the annual cost impact for an investment of EUR 10,000. The other breaks the total down into entry and exit costs, ongoing costs, transaction costs, performance fees and carried interest. Our explainer Reading a Key Information Document goes through both. The KID covers the product's own costs only.
Your bank's or adviser's cost disclosure
Under EU rules, a firm that sells you a fund or advises you on it must show you, before you invest and then at least once a year, the aggregated costs of the product and of its own services, in euros and as a percentage. It must also illustrate the cumulative effect of those costs on your return, and disclose any payments it receives from the fund manager. This is the only place where all your costs appear together.
The annual report
The fund's annual report shows what the fund actually cost over the year, including transaction costs and any performance fees paid. Look also at the portfolio turnover, which tells you how much the fund trades.
Annual cost impact: the figure that ties it together
The annual cost impact, called "reduction in yield" in earlier versions of the KID, shows how much all of a product's costs reduce your average return each year over a given holding period. It includes running costs, transaction costs and performance fees, and spreads any one-off entry and exit charges over the holding period. That is why it depends on how long you stay:
| Annual cost impact | If you exit after 1 year | If you exit after 5 years |
|---|---|---|
| No entry charge | 1.4% | 1.4% each year |
| With a 3% entry charge | 4.3% | 2.0% each year |
A one-off charge costs little when spread over many years, but a great deal if you leave early.
A worked example over ten years
Two fictitious funds, each bought for EUR 10,000 and held for ten years on a platform that charges 0.25% a year. To isolate the effect of costs, both are assumed to earn 5% a year before costs. Without any costs at all, the investment would grow to EUR 16,289.
| Fund A (index) | Fund B (active) | |
|---|---|---|
| TER | 0.20% | 1.50% |
| Transaction costs | 0.05% | 0.35% |
| Platform fee | 0.25% | 0.25% |
| Entry charge | none | 3% |
| Running costs per year | 0.50% | 2.10% |
| Value after 10 years | EUR 15,493 | EUR 12,779 |
| Costs paid over 10 years | EUR 644 | EUR 2,729 |
| Shortfall against no costs | EUR 796 | EUR 3,510 |
| Annual cost impact | 0.52% | 2.52% |
On the TER alone, Fund B looks 1.3 percentage points a year more expensive. Once transaction costs and the entry charge are included, the gap is 2.0 points a year. Over ten years the investor in Fund B ends up EUR 2,714 behind the investor in Fund A. The shortfall is larger than the charges themselves, because money taken in charges stops earning a return.
That does not make Fund B a poor choice by definition. To match Fund A after costs, it must beat it by about two percentage points a year before costs. Some active managers do that over long periods, but many do not. Judge it from the fund's record and its process, not from the TER alone.
A note on private equity and closed-ended funds
In private equity, costs work differently. The management fee is often charged on the capital investors have committed during the investment period, and later on the capital actually invested. In the early years, before most of the money has been put to work, costs can be high relative to the value of the holdings. On top of that, the manager usually receives carried interest, a share of profits above a preferred return, along with fund set-up and deal-related expenses. A TER based on net assets in a single year can therefore give a misleading picture. Look instead at the annual cost impact over the full term in the KID, and at the fee section of the fund documents.
Questions to ask before you invest
- What is the annual cost impact at the recommended holding period, and how does it compare with similar funds?
- What are the transaction costs, and how much does the fund trade?
- Is there an entry or exit charge, and will it actually be applied to you?
- Is there a performance fee or carried interest, and exactly how is it calculated?
- What will your bank, platform or adviser charge on top, and do they receive payments from the fund manager?
- Is there a cheaper share class of the same fund that you are eligible for?
Frequently asked questions
Is a lower TER always better?
Not on its own, because the TER leaves out important costs, and because a fund may earn its costs back. But costs are certain and returns are not. Between two funds doing much the same thing, the one with the lower total cost has a reliable advantage.
Why does the cost figure in the KID differ from the TER on the factsheet?
They usually cover different things and different periods. A factsheet TER often reports last year's operating costs only. The KID's annual cost impact also includes transaction costs, performance fees and one-off charges spread over the holding period.
Do I pay the TER separately?
No. It is deducted from the fund's assets, so it reduces the unit price rather than appearing on your statement. The fund's published returns are already net of it.
What is a "clean" share class?
A share class that pays no commission to distributors, and so has a lower TER. You pay your adviser or platform directly instead. Under EU rules, firms providing independent advice or portfolio management may not keep such commissions, so clean share classes are common in those services.
Are costs counted twice in a fund of funds?
A fund that invests in other funds bears costs at two levels: its own, and those of the funds it holds. A synthetic TER, or the KID's cost figures, should include both. If a fund of funds quotes only its own fee, ask for the combined figure.
In summary
The TER is a fair measure of what it costs to run a fund, but not of what it costs to own one. Transaction costs, one-off charges, performance fees and carried interest sit outside it, and so do the fees of whoever sells you the fund. For the full picture, use the annual cost impact and total costs in the KID for the product, and your provider's annual cost statement for everything together. Costs compound just as returns do, and they are the one part of investing you can know in advance.