Expense ratio — fund cost ratio (TER)
What is expense ratio (TER), how it affects your profits from ETFs and investment funds and what to look for when choosing a fund.
Definition
Expense ratio (Total Expense Ratio, TER) is the annual cost of managing an investment fund or ETF, expressed as a percentage of assets. If an ETF has an expense ratio of 0.20%, it charges 20 PLN annually from every 10,000 PLN invested to cover operational costs.
What does expense ratio include?
- Management fee
- Administrative and legal costs
- Audit costs
- Index license costs (for ETFs)
What does it NOT include?
- Broker commission for buying/selling
- Spread (bid/ask difference)
- Rebalancing costs inside the fund (partially)
- Transaction taxes
Why does expense ratio matter enormously?
A 0.20% vs. 1.50% fee looks like a small difference. But in the long term, thanks to compound interest, costs eat up a fortune:
| ETF (0.20% TER) | Active fund (1.50% TER) | |
|---|---|---|
| Initial investment | 50,000 PLN | 50,000 PLN |
| Gross return | 7% annually | 7% annually |
| After 20 years | ~186,000 PLN | ~148,000 PLN |
| Difference | -38,000 PLN |
A difference of 1.3 p.p. annually cost you 38,000 PLN on a 50,000 PLN portfolio. With larger amounts the effect is proportionally greater.
Typical expense ratios
| Fund type | Typical TER |
|---|---|
| Broad index ETF (VWCE, IWDA) | 0.07–0.22% |
| Smart beta ETF | 0.20–0.50% |
| Active fund (TFI in Poland) | 1.00–2.50% |
| Hedge funds | 1.50–2.00% + 20% of profit |
What to pay attention to?
- Compare within category — compare S&P 500 ETF expense ratio with another S&P 500 ETF, not with a bond fund
- Lower ≠ always better — a fund with 0.50% TER tracking a niche index may be worth its price
- OCF vs TER — OCF (Ongoing Charges Figure) is a newer standard in Europe and may differ minimally from TER
How Freenance can help
Freenance shows the total costs of your funds and ETFs, so you can see how much you're really paying for portfolio management. Cost transparency is the first step to optimization.
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