The Long-Term Impact of ETF Fees on Your Portfolio

A fund's ongoing charges are taken daily from its net asset value, with no line on a statement and nothing debited from an account: they show only in the performance, by their absence. That is what makes them easy to ignore and expensive to neglect. One point of annual fees looks trivial against an expected return of six or seven per cent, but it applies every year to the capital reached, and so also removes the return that the amount taken would itself have earned. Over thirty years, one point of annual fees costs roughly a quarter of the final capital, and two points close to half, whatever the market returns. It is also the only variable in the comparison known in advance, where future performance never is, which is why it deserves the first look rather than the last one.

The invisible cost of investing

Total Expense Ratio (TER) is the annual fee charged by an ETF, expressed as a percentage of your invested assets. A 0.20% TER means you pay 2 EUR per year for every 1,000 EUR invested. It seems negligible, but compound interest works against you too.

How fees compound over time

Consider two identical MSCI World ETFs with different TERs:

• ETF A: 0.12% TER (e.g., iShares MSCI World)
• ETF B: 0.38% TER (e.g., Amundi MSCI World CW8)

With a 200 EUR/month investment over 30 years at 7% gross return:

• ETF A (0.12% TER): ~236,000 EUR
• ETF B (0.38% TER): ~227,000 EUR
• Difference: ~9,000 EUR

That 0.26% annual difference costs you nearly 9,000 EUR over 30 years. And this is with a modest 200 EUR/month contribution.

Beyond TER: total cost of ownership

TER is not the complete picture. The true cost of holding an ETF includes:

• TER (management fee)
• Tracking difference (how well the ETF follows its index)
• Bid-ask spread (transaction cost when buying/selling)
• Broker fees (platform charges, execution fees)

Tracking difference is often more important than TER. Some ETFs with higher TER actually deliver better net performance because of superior tracking, securities lending income, or tax optimization.

The cheapest ETFs by category

Here are the lowest-cost options for popular categories:

• MSCI World: Invesco MSCI World (0.19% TER) or iShares Core MSCI World (0.20% TER)
• S&P 500: Invesco S&P 500 (0.05% TER) or iShares Core S&P 500 (0.07% TER)
• Europe: BNP Paribas Easy STOXX 600 (0.20% TER)
• Emerging Markets: Amundi MSCI Emerging Markets (0.20% TER)
• Bonds: Xtrackers Eurozone Government Bond (0.15% TER)

When higher fees are justified

Higher TER can be worth paying in specific situations:

• PEA eligibility (Amundi CW8 at 0.38% is the only option for World exposure on PEA)
• Niche exposure (thematic ETFs naturally cost more due to smaller fund sizes)
• Physical replication preference (sometimes costs slightly more than synthetic)

How to minimize your total costs

• Choose a broker with free ETF savings plans
• Compare tracking difference, not just TER
• Use the Right ETF screener to filter by cost
• Avoid frequent trading (buy and hold minimizes bid-ask costs)
• Consider tax-advantaged wrappers (PEA, ISA) to reduce tax drag

Our advice

For core portfolio holdings (World, S&P 500, Europe), always choose the lowest-cost option unless you have a specific reason (like PEA eligibility) to pay more. For satellite positions (thematic, niche), accept slightly higher TERs but aim for ETFs under 0.50%. And always check tracking difference alongside TER.

What ongoing charges leave out

The figure shown on the key information document, the ongoing charges, excludes several real costs. The fund's internal transaction costs, incurred when the index rebalances, are not in it and are read in the annual report. The cost of the swap, for a synthetically replicated fund, is not in it either. Conversely, securities lending earns the fund income and lowers its real cost without appearing in the stated fee. The one figure that sums it all up is tracking difference, the performance actually delivered against the index, published in the annual report: that is what should be compared, not the ongoing charges.

The costs that are not inside the fund

Three items add to these, and on small amounts they often exceed the fund's own charges. Dealing charges, billed on every order, which make a monthly contribution of one hundred euros very expensive at a broker charging three euros a trade. The annual custody fee, quoted as a percentage of assets, which grows with the portfolio while dealing charges stay fixed. And currency conversion charges, often a quarter to half a point on buying and on selling a dollar-priced fund. Cutting the fund's fees without looking at those three often means optimising the smallest of the four.

How to check what a fund really costs

The exercise takes three readings. The key information document gives ongoing charges and the distribution policy. The annual report gives the year's tracking difference, internal transaction costs and any securities lending income: it is the only document that says what the fund actually cost. The broker's tariff sheet gives the rest. The sum of the three is the total cost of ownership, and that is what should be compared between two funds, not the ongoing charges line taken on its own.

Where a fee cut is worth making

The order of magnitude decides where to spend effort. Moving from 0.50 to 0.20 per cent on a core holding is worth a quarter of the final capital over thirty years and takes one order. Moving from 0.22 to 0.20 on the same holding is worth almost nothing and is rarely worth realising a capital gain to achieve. Switching broker to obtain a free regular investment plan can be worth more than either, on a portfolio built by monthly contributions. And holding on rather than trading is free, which no fee comparison will ever say.