One of the most significant advantages of ETF investing is its low cost. But costs are not limited to the headline fund fee — a full picture of ETF costs includes several components that add up and compound over time.
The TER (Total Expense Ratio) or OCF (Ongoing Charges Figure) is the annual management fee charged by the fund. For a broad market index ETF, this typically ranges from 0.03% to 0.25% per year. This fee is deducted from the fund's assets daily, rather than charged explicitly, so it is invisible in normal portfolio statements — but it is real and compounds over time.
Platform fees are charged by the brokerage or investment platform where you hold your ETFs. These range from flat annual fees (common for larger portfolios) to percentage-based fees (typically 0.1-0.45% per year, often capped at a maximum). Choosing the right platform for your portfolio size matters: flat-fee platforms are better for large portfolios, percentage-fee platforms for small ones.
Trading costs include the commission charged per trade (many platforms now charge zero for standard trades) and the bid-ask spread — the difference between the price you pay to buy and the price you receive when selling. For popular, liquid ETFs on major indices, spreads are very tight (a few pennies). For niche or smaller ETFs, they can be wider.
Stamp Duty is not charged on ETFs listed in the UK (unlike UK shares, which attract 0.5% stamp duty on purchase). This is a cost advantage of ETFs over direct share purchases.
Tracking error measures how closely the ETF follows its underlying index. A perfect index ETF would match the index exactly; in practice, costs, portfolio management, and sampling (not holding every constituent) cause small deviations. A well-run large ETF should track its index within 0.05-0.15%.
Total cost awareness matters because costs compound just as returns do. An extra 0.5% annual cost, sustained over 30 years, can reduce your final portfolio value by around 14%.