Everything you need to know about ETF fees

Exchange traded funds are a low-cost way to get diversified exposure to stocks, bonds, or other assets. Even so, every ETF carries an ongoing charge that quietly reduces returns over time. Understanding what the ongoing charge (often shown as OCF or TER) covers, how it is taken, and how much it matters will help investors keep more of their gains.

What is the ongoing charge (OCF / TER)?

The ongoing charge also called the total expense ratio (TER) is the annual percentage cost of running the ETF. It reflects the fees and operating expenses needed to manage, administer, market, and custody the fund. Even passive ETFs have these costs; they are simply lower than many active funds.

What the OCF typically includes

• Fund management fees
• Accounting and auditing fees
• Custodian and administration costs
• Legal and regulatory expenses
• Marketing and distribution (where applicable)

How the charge is taken

The OCF is not deducted from an investor’s cash balance. Instead, it is taken from the fund’s assets and reflected in the ETF’s price (NAV). Because it accrues daily, investors don’t see a single charge appear on their account the ETF’s market value simply grows slightly less than it otherwise would.

For dividend-paying (distributing) ETFs the charge can be covered from income, capital, or a mix, depending on the fund’s structure. Either way, the cost is shared across all holders via the fund’s returns rather than pulled one-by-one from investor accounts.

Where to find the OCF

Look for the OCF or TER in the ETF’s key documents: the Key Investor Information Document (KIID), the factsheet, or the provider’s PDF factsheet. Broker platforms also usually display the OCF on each ETF’s product page.

Why the OCF matters — a simple illustration

Small differences in fees compound over many years. Consider two ETFs with the same pre-fee return but different OCFs:

• Starting capital: £10,000
• Gross annual return before fees: 7%
• ETF A OCF: 0.07% → net annual return ≈ 6.93%
• ETF B OCF: 0.50% → net annual return ≈ 6.50%

After 20 years ETF A would grow to roughly £38,170, while ETF B would reach about £35,250 — a difference of nearly £2,920. Over longer horizons or with larger sums, that gap widens.

Other costs to watch for

OCF is important, but it is not the only cost:

• Platform fees: Brokers and platforms often charge account or custody fees that are separate from the ETF’s OCF.
• Trading costs: Spreads and commissions when buying or selling ETFs add frictional costs.
• FX conversion fees: Investing in ETFs priced in a different currency introduces conversion costs.
• Tracking error: The difference between an ETF’s performance and its benchmark can act like an implicit cost.

Product-style review: ETF fees (OCF) at a glance

Specifications

• Type: Ongoing annual fee expressed as a percentage
• Charged from: Fund assets (reflected in NAV)
• Visibility: KIID, factsheets, ETF provider pages, broker product pages

Pros

• Transparent and standardized metric for comparing funds
• Low OCFs are a major advantage of passive ETFs
• Taken from the fund, so no one-off debit hits an investor’s cash balance

Cons

• Small percentages can erode returns significantly over decades
• OCF does not capture platform fees or trading costs
• Higher-cost ETFs require careful justification (special strategies, niche exposure)

Who should care most

• Long-term buy-and-hold investors fees compound and matter most here
• Cost-conscious investors building core portfolios with broad market ETFs
• Anyone comparing similar ETFs where the only meaningful difference is cost

Practical recommendations

1. Compare OCFs when choosing between similar ETFs. Favor lower-cost funds for core, long-term holdings.
2. Always calculate total cost: add platform and trading fees to the ETF’s OCF to understand the real drag on returns.
3. Check the KIID or factsheet for how the fund treats dividends and where the OCF is drawn from.
4. Watch for hidden costs: wide bid-ask spreads, FX conversions, and poor liquidity can outweigh small OCF savings.
5. Revisit ETF choices periodically providers lower fees and new, cheaper options appear over time.

Final verdict

OCF and TER are simple but powerful metrics. They are not the only factor to consider but are one of the easiest levers an investor can control. For long-term, passive investors, choosing low-cost ETFs and factoring in platform and trading fees will preserve a meaningful portion of potential gains. Small percentage differences may look negligible today but translate into real money after years of compounding.