Every ETF advertises its TER — the total expense ratio. Investors compare two funds, pick the lower number, and assume the job is done. It is not: TER is one of three costs, and it is the only one printed on the label.

1. TER — the advertised fee

The TER covers management, administration and licensing, deducted continuously from the fund's assets. You never see a charge; it simply drags the fund's performance below the index by that amount each year. For broad index ETFs this is typically a small fraction of a percent.

2. Tracking difference — the honest number

This is the one professionals actually watch. Tracking difference is the real gap between the fund's return and the index's return over a period. It includes the TER, but also everything the TER does not cover: transaction costs inside the fund, cash drag, and — crucially — withholding tax on dividends.

Because of that last item, tracking difference can be surprising. A fund with a slightly higher TER but a better tax structure or securities-lending income can genuinely deliver more than a cheaper rival. Compare tracking difference over several years, not TER over zero.

3. Spread — what you pay to get in and out

The bid-ask spread is the gap between the buying and selling price at any moment. It is a one-off cost per transaction, so its importance depends entirely on your behaviour:

  • Buy once a month and hold for decades → spread is almost irrelevant.
  • Trade frequently → spread can quietly dwarf the TER.

Spreads widen on small, thinly traded funds and during volatile market opens. Trading in the middle of the day, when both the ETF's market and its underlying market are open, usually gets you a tighter spread.

What to actually check

  1. Tracking difference over 3–5 years versus the same index.
  2. Fund size — very small funds risk closure and tend to have wider spreads.
  3. TER, as a tiebreaker rather than the decision.

Summary

TER is the cost you are shown; tracking difference is the cost you pay. For a buy-and-hold investor, the fund that tracks its index most closely over years wins — even if its label looks slightly more expensive.