ETF fees may appear almost insignificant when expressed as a fraction of one percent. Over several decades, however, investors lose both the fees deducted from their portfolios and all the future returns that money could have generated.
Exchange-traded funds have made diversified investing considerably cheaper and more accessible. An investor can purchase hundreds—or even thousands—of securities through a single fund, often for an annual expense ratio below 0.25%.
The difference between an ETF charging 0.07% and another charging 0.50% may not initially seem important. On a €10,000 investment, it represents only €43 during the first year.
However, that comparison overlooks compounding.
Every euro removed in fees is a euro that can no longer participate in future market gains. As the portfolio grows, the annual amount deducted also increases. Over 20, 30 or 40 years, apparently small differences can become substantial.
Fees are therefore one of the few investment variables investors can evaluate before purchasing a fund. Future market performance is uncertain; the expense ratio is published in advance.
ETF fees at a glance
| Annual fee | Cost on €10,000 in first year | Cost on €100,000 in first year |
| 0.05% | €5 | €50 |
| 0.07% | €7 | €70 |
| 0.20% | €20 | €200 |
| 0.50% | €50 | €500 |
| 1.00% | €100 | €1,000 |
These figures show only the approximate first-year fund expense. They do not measure the returns subsequently lost because the deducted money is no longer invested.
What is an ETF expense ratio?
The expense ratio is the annual cost of operating an ETF, expressed as a percentage of its average net assets.
Depending on the fund, it can cover:
- portfolio management;
- fund administration;
- custody;
- accounting;
- legal expenses;
- regulatory reporting;
- index licensing;
- shareholder services;
- other operating costs.
Investors do not normally receive a separate invoice. The expenses are deducted from the ETF’s assets and gradually reflected in its net asset value.
Vanguard explains that an expense ratio represents the costs paid by an ETF or mutual fund for management and administration and that these costs are removed before returns reach investors. Vanguard provides a detailed explanation of expense ratios.
For European UCITS ETFs, investors may encounter several related terms:
- TER: Total Expense Ratio;
- OCF: Ongoing Charges Figure;
- ongoing costs: the terminology commonly found in a Key Information Document;
- management fee: sometimes only one component of total operating costs.
These figures are related but may not always cover exactly the same expenses. The latest Key Information Document, factsheet and prospectus should therefore be consulted.
How fees reduce returns
Suppose an ETF’s underlying portfolio earns 7% during one year.
If the ETF charges 0.20%, its approximate return before considering tracking effects and taxes would be 6.80%.
If another ETF tracking the same market charges 1%, its corresponding return would be approximately 6%.
The annual difference is one percentage point minus the lower fund’s fee:
[
(7%-0.20%)-(7%-1.00%)=0.80%
]
That gap may appear small over a single year. It becomes much larger when repeated across several decades.
The US Securities and Exchange Commission emphasises that a higher-cost fund must perform better than a lower-cost fund simply to produce the same net return for the investor. The SEC’s ETF fee bulletin also warns that even small cost differences can produce significant long-term differences.
The hidden cost: lost compounding
Fund expenses create two distinct costs:
- The amount deducted from the portfolio;
- The future return that the deducted amount can no longer earn.
The second effect explains why fees become increasingly important over time.
If €20 is removed from a portfolio this year, the investor does not merely lose €20. That money could otherwise have remained invested for another 10, 20 or 30 years.
At a hypothetical annual return of 7%, €20 left invested for 30 years would grow to approximately €152. The initial deduction was small, but its long-term opportunity cost was considerably larger.
Investor.gov describes the same mechanism: fees reduce both the current portfolio balance and the returns that could have been earned on the deducted money. Its official guide illustrates the cumulative effect of investment expenses.
What different ETF fees do to €10,000
The following illustration assumes:
- an initial investment of €10,000;
- a constant gross annual return of 7%;
- all returns reinvested;
- no additional contributions;
- annual ETF fees of 0.07%, 0.20%, 0.50% or 1%;
- no taxes, brokerage costs or currency effects.
| Holding period | 0.07% fee | 0.20% fee | 0.50% fee | 1.00% fee |
| 10 years | €19,543 | €19,307 | €18,771 | €17,908 |
| 20 years | €38,194 | €37,276 | €35,236 | €32,071 |
| 30 years | €74,643 | €71,968 | €66,144 | €57,435 |
| 40 years | €145,876 | €138,947 | €124,161 | €102,857 |
After 40 years:
- the difference between 0.07% and 0.20% is approximately €6,929;
- the difference between 0.07% and 0.50% is approximately €21,715;
- the difference between 0.07% and 1% is approximately €43,019.
The ETF charging 1% would leave the investor with roughly 29% less money than the ETF charging 0.07%, even though the fee difference is less than one percentage point annually.
These are simplified illustrations rather than forecasts. Actual returns vary from year to year, and fund expenses can change.
Fees become even more important with regular contributions
Most long-term investors do not make only one initial investment. They add money monthly or annually.
Suppose an investor contributes €300 each month for 30 years and the underlying portfolio produces a hypothetical 7% annual return.
A higher expense ratio affects:
- the earliest contribution for nearly 30 years;
- the next contribution for slightly less time;
- every subsequent contribution until the end of the period;
- the accumulated returns generated by all previous contributions.
A fee difference therefore applies not only to the original capital but to a portfolio that may eventually become worth hundreds of thousands of euros.
The larger the balance and the longer the holding period, the more important recurring costs become.
Is the expense ratio deducted from dividends?
ETF fees are not usually charged only against dividends or as an annual withdrawal from the investor’s brokerage account.
Instead, operating expenses are continually deducted from the fund’s assets. They reduce the ETF’s net asset value and therefore affect its total return.
This mechanism applies to both:
- accumulating ETFs, which reinvest portfolio income;
- distributing ETFs, which pay some income to shareholders.
An accumulating share class does not avoid the expense ratio. Its dividends are reinvested after the relevant fund-level costs and taxes have affected the portfolio.
Low fees provide a certain advantage
An investor cannot know in advance:
- which country will outperform;
- whether growth or value stocks will lead;
- how interest rates will evolve;
- which currency will strengthen;
- what the market will return next year.
The published fund fee is far more predictable.
If two ETFs provide substantially identical exposure, replication, tax treatment and tracking quality, choosing the lower-cost fund provides an immediate structural advantage.
The cheaper ETF does not need to make a successful market forecast. It simply transfers less of the portfolio to operating expenses every year.
That does not guarantee better performance, because other fund characteristics can offset the fee difference. Nevertheless, cost is one of the most reliable starting points for ETF comparison.
A low TER does not guarantee the lowest total cost
The expense ratio is important, but it is not the complete cost of owning an ETF.
Investors should also examine:
- tracking difference;
- bid-ask spread;
- brokerage commissions;
- currency-conversion costs;
- stock-exchange transaction taxes;
- premium or discount to net asset value;
- securities-lending revenue;
- withholding-tax leakage;
- fund domicile;
- tax treatment;
- rebalancing and switching costs.
An ETF charging 0.15% can occasionally produce a better net result than one charging 0.10% if it tracks its index more efficiently.
Expense ratio vs. tracking difference
The expense ratio is the fund’s published operating cost.
The tracking difference measures how the ETF’s actual return differs from the return of its benchmark over a specified period.
If an index returns 10% while its ETF returns 9.82%, the tracking difference is approximately –0.18 percentage points.
Tracking difference can reflect:
- the expense ratio;
- portfolio taxes;
- transaction costs;
- sampling;
- cash temporarily held by the fund;
- index-rebalancing costs;
- securities-lending income;
- operational efficiency;
- the timing of dividend reinvestment.
Securities-lending revenue can sometimes compensate for part of an ETF’s expenses. As a result, an ETF may trail its benchmark by less than its stated fee. In unusual periods, it may even slightly outperform the benchmark.
Investors should compare multi-year tracking differences rather than relying on a single year.
Trading costs matter more for frequent investors
An ETF’s expense ratio applies for as long as the investment is held. Trading costs arise when shares are purchased or sold.
These may include:
- broker commission;
- bid-ask spread;
- foreign-exchange charges;
- transaction taxes;
- exchange or service fees.
Consider an investor purchasing €200 of an ETF every month.
If each order costs €2, the investor immediately loses 1% of every contribution:
€2 / €200=1%
That initial trading cost is far larger than the annual difference between an ETF charging 0.10% and another charging 0.20%.
For smaller portfolios, reducing trading frequency—or using an inexpensive savings plan—can therefore matter more than selecting the ETF with the absolute lowest expense ratio.
Bid-ask spreads are an indirect fee
ETFs trade on an exchange with two quoted prices:
- the bid, at which investors can sell;
- the ask, at which investors can buy.
The difference is the bid-ask spread.
If an ETF has a bid of €99.90 and an ask of €100.10, its spread is €0.20, or approximately 0.20% of the midpoint price.
A wide spread creates an immediate cost when entering or leaving the investment. It can be particularly relevant for:
- specialised thematic ETFs;
- small funds;
- less frequently traded share classes;
- transactions outside the main market hours;
- volatile market conditions.
For a long-term investor, a one-time spread becomes less significant when distributed across many years. For an active trader, repeated spreads can outweigh the annual fund fee.
Does a more expensive ETF ever make sense?
Yes. The cheapest ETF is not automatically the most appropriate.
A higher fee may be justified when the fund offers:
- exposure unavailable through cheaper products;
- superior liquidity;
- narrower spreads;
- more consistent tracking;
- a preferred replication method;
- a currency-hedged share class;
- a more suitable fund domicile;
- better tax treatment;
- a longer operating history;
- greater assets under management;
- access through the investor’s preferred broker;
- an accumulating or distributing structure that better fits the portfolio;
- stronger operational infrastructure.
A 0.40% global small-cap ETF may provide valuable diversification that a 0.07% S&P 500 ETF cannot deliver. The two products are not substitutes simply because one is cheaper.
Cost comparisons are meaningful only between ETFs performing substantially the same portfolio function.
Core ETFs and specialised ETFs
Broad-market index ETFs tend to have lower fees because:
- their indices are widely followed;
- assets under management are large;
- securities are liquid;
- replication is relatively straightforward;
- competition between providers is intense.
Specialised ETFs can charge more because they may require:
- complex index methodologies;
- frequent rebalancing;
- derivatives;
- exposure to less-liquid markets;
- active security selection;
- currency hedging;
- specialised data or licensing;
- smaller fund structures.
A higher fee is not necessarily unacceptable. Investors must determine whether the additional exposure provides enough expected benefit to justify the recurring cost.
Real-world UCITS ETF examples
Fees vary significantly even within passive investing.
As of August 2026, the iShares Core S&P 500 UCITS ETF reported a total expense ratio of 0.07%. The current fee and fund characteristics are available on the official iShares product page.
The iShares Core MSCI World UCITS ETF reported a total expense ratio of 0.20% in its June 2026 factsheet. The official iShares factsheet provides the complete fund details.
This does not mean that the S&P 500 ETF is automatically better. The MSCI World fund provides exposure to companies across multiple developed markets, while the S&P 500 fund concentrates on US large-cap equities.
The additional 0.13 percentage points purchase different geographic exposure. Investors must first select the appropriate index and then compare costs between funds tracking that index.
How much attention should investors give to tiny differences?
The importance of a fee difference depends on its size, the portfolio and the holding period.
Difference between 0.07% and 0.10%
This is only €3 annually on an initial €10,000. Other considerations—tracking, spread, domicile, tax treatment and broker availability—may be more important.
Difference between 0.10% and 0.25%
This is more meaningful over several decades, particularly for a large core holding.
Difference between 0.20% and 0.75%
This can create a substantial long-term return gap and deserves careful justification.
Difference between 0.20% and 1.50%
The higher-cost strategy must generate considerable additional performance simply to overcome its annual disadvantage.
Investors should avoid becoming so focused on saving a few basis points that they choose the wrong index, incur unnecessary taxes or repeatedly switch funds.
Avoid frequent switching to chase lower fees
Suppose an investor already owns an ETF charging 0.20% and discovers a similar fund charging 0.12%.
Switching could reduce future annual expenses by 0.08 percentage points. However, selling and repurchasing may create:
- two bid-ask spreads;
- brokerage fees;
- foreign-exchange charges;
- transaction taxes;
- possible capital-gains taxation;
- time outside the market;
- administrative work.
On a €10,000 position, an annual saving of 0.08% equals only €8 initially. If switching costs €60, it could take years to recover the expense.
The correct comparison is between the present value of future fee savings and the complete cost of switching—not simply between the two published TERs.
Fee waivers and temporary discounts
Some ETFs advertise a reduced fee that applies only temporarily or until the fund reaches a specified asset level.
Investors should check:
- whether the published fee is permanent;
- whether part of the expense ratio is being waived;
- when the waiver expires;
- what the full fee would be afterwards;
- whether the provider has previously changed the fee.
ETF fees can be reduced as funds grow and competition increases, but they can also be revised. Long-term projections should not assume that today’s fee is guaranteed for several decades.
What European and Belgian investors should compare
European investors should identify the exact UCITS share class rather than relying only on the ETF’s commercial name.
Important details include:
- ISIN;
- benchmark;
- ongoing charges or TER;
- historical tracking difference;
- fund domicile;
- accumulating or distributing structure;
- replication method;
- trading currency;
- currency-hedging policy;
- exchange and bid-ask spread;
- broker commission;
- local tax treatment.
For Belgian investors, the stock-exchange transaction tax can make purchase and sale costs particularly relevant. The applicable rate may depend on the exact ETF and its registration status.
Belgian tax and transaction costs are separate from the ETF’s expense ratio. A fund with a lower TER can still be more expensive overall if it receives less favourable operational or tax treatment.
Investors should therefore verify the precise ISIN with their broker or an appropriate adviser before trading.
A practical ETF cost checklist
Before purchasing an ETF, ask:
- Does the ETF track the index I actually want?
- How does its fee compare with equivalent funds?
- Has its tracking difference been stable?
- Is the fund large enough to remain economically viable?
- Is the bid-ask spread reasonable?
- What commission will my broker charge?
- Will my broker convert currencies?
- Does the investment incur a transaction tax?
- Is the fund accumulating or distributing?
- Is it hedged or unhedged?
- What is its domicile?
- Are there tax consequences specific to this share class?
- Would switching from an existing ETF cost more than the expected saving?
Common ETF fee mistakes
“A 1% fee is insignificant”
One percent of a small portfolio may initially look modest. Applied annually to a growing portfolio, it can consume a large share of the eventual wealth.
“The TER is charged once”
The expense ratio is recurring. It affects the fund every year the investment is held.
“I will receive a bill for the fee”
ETF operating expenses are normally deducted inside the fund and reflected in its net asset value.
“The lowest-fee ETF is always best”
The ETF must first provide the correct exposure. Liquidity, tracking, taxes and structure can be more important than a very small fee advantage.
“An ETF with no trading commission is free”
The fund can still have an expense ratio, bid-ask spread, tracking difference and other indirect costs.
“Past performance already proves which ETF is cheaper”
Different performance can reflect index exposure, currencies, dividends, taxes and tracking methodology—not only fees.
Final verdict
ETF fees matter because they compound in reverse.
Every recurring deduction reduces the capital available to generate future returns. The effect may be barely visible during the first year, but it can become substantial across a 20-, 30- or 40-year investment horizon.
For comparable ETFs tracking the same index, a lower fee creates a durable advantage. Investors should nevertheless avoid selecting funds on the expense ratio alone.
The most effective approach is to evaluate costs in the correct order:
- Choose the appropriate asset allocation and index;
- Identify structurally suitable ETFs;
- Compare their expense ratios and tracking records;
- Include spreads, brokerage, currency and tax costs;
- Select the fund offering the best overall implementation.
A few basis points should not determine an investor’s entire strategy. But an unnecessarily high recurring fee should not be ignored either.
The market return is uncertain. The cost deducted from it is not.
This article is provided for informational purposes only and does not constitute personalised investment, tax or legal advice. ETF expenses, taxation and fund characteristics can change. Investors should consult the latest prospectus and Key Information Document before investing.
Sources: SEC—Mutual Fund and ETF Fees and Expenses, Investor.gov—How Fees Affect Your Portfolio, Vanguard—Understanding Expense Ratios, Vanguard—Why Low ETF Expense Ratios Matter Over Time, iShares Core S&P 500 UCITS ETF, iShares Core MSCI World UCITS ETF factsheet
