Expense ratios explained
What a fund’s ongoing charge actually deducts, why small percentage gaps compound, and which fees sit outside the expense ratio.
Northline DeskUpdated 4 min read
The expense ratio is the annual fee a fund charges to run itself, expressed as a percentage of the assets. You will also see it called the ongoing charge, OCF, or TER. The initials differ. The direction of the money does not: it leaves the fund every year, whether the market was kind or not.
What the percentage is doing
A fund with an ongoing charge of 0.20 percent deducts that rate across the year from the fund’s assets. You do not get an invoice. The price is simply a little lower than it would have been. On a small balance the deduction looks trivial. On a balance that has had twenty years of contributions, the same rate has been applied to a much larger number, every year, and the money deducted never got to compound.
That is the whole argument for caring. Not moralism about fees. Arithmetic.
| Illustrated net return | Value after 20 years |
|---|---|
| 6.8% a year | £101,692 |
| 5.5% a year | £87,125 |
| Gap | about £14,600 |
£200 a month in both rows. The 1.3 percentage-point gap is a way to picture fee drag. It is not a prediction of what any fund or broker will deliver.
The table is an illustration of two constant rates on the same £200 monthly contribution. It is not a forecast of shares, and it is not the fee of any particular fund. It only shows that a gap of a little over one percentage point in the net rate changes the destination. Some of a real-world gap is fees. Some is luck, tax, and what the fund owns. You can control the fee more tightly than the luck.
What the expense ratio does not include
The ongoing charge is not the full cost of investing. Outside it, you may pay:
- A broker’s foreign-exchange fee when your cash and the investment use different currencies.
- The spread, when you buy or sell.
- Stamp taxes or other transaction taxes, depending on the market and the country.
- A platform fee, at brokers that charge one. Many modern brokers advertise zero commission and still charge for conversion.
A fund can be cheap and the round trip can still be expensive if you trade it every week or convert currency carelessly. Beginner investing mistakes includes this one because it hides behind a “commission-free” label.
How to compare two funds
Compare funds that do the same job. A 0.12 percent global equity ETF and a 0.12 percent niche commodity product are not alternatives. First match the index and the share class, then prefer the cheaper, larger, plainer fund unless you have a specific reason not to.
A fund that costs 0.50 percent to own a broad market is not outrageous by the standards of older products, and it is still a lot to pay when a similar tracker is available well below 0.25 percent. Active funds that cost nearer 1 percent have a harder job: they must earn that gap back, repeatedly, after the fee. Some do. You do not know which ones in advance.
What is an ETF shows where the charge sits on the factsheet. A simple global ETF portfolio is the case where the charge should be obviously low, because you are not paying anyone to be clever.
The broker’s cut is a separate line
If you buy the cheap fund inside an expensive currency conversion, you have donated the saving back. Before you automate a monthly buy, read the conversion fee and see whether the ETF is listed in your own currency. Sometimes the same fund has several listings. The underlying holdings can be identical while the conversion experience is not.
Trading 212 publishes a fee schedule that has changed before and will change again, so this page will not quote a number that might be stale. Read the live page. If you do not yet have an account, this Trading 212 referral link (referral link, opens in a new tab) is the invite we use. The referral does not discount the expense ratio. Fund fees belong to the fund.
A rule that fits on a card
Pay up only when you are buying something different, not when you are buying the same market with a louder name. Write the ongoing charge next to the fund when you choose it. If you cannot find the number in two minutes, you are not ready to buy that fund.
Questions
Is a lower expense ratio always better?
Among funds that own the same kind of market, a lower ongoing charge is a rare free improvement. A lower charge does not help if the fund owns something riskier or narrower than you meant to buy.
Where do I see the charge on a statement?
Often you do not. The ongoing charge is taken inside the fund, so the price you see is already net of it. That is why it is easy to ignore and why the factsheet matters.