TER (total expense ratio)

The TER is the number everyone compares, because it is the number that is easiest to find. It sits in every factsheet, it is standardised, and it feels like a price tag. For a first filter, it is genuinely useful: a fund charging many times more than a comparable index fund has to justify that gap with something, and most cannot.

But the TER is a promise about costs, not a record of them. Two things slip through. Internal trading costs — every time the index rebalances, the fund pays spreads and fees that appear in no expense ratio. And side revenue — many funds lend their holdings to short sellers for a fee (securities lending), which flows back into the fund and quietly offsets costs.

The number that nets all of this out is the tracking difference: what the index returned versus what the fund actually delivered. Funds with identical TERs can differ meaningfully on that measure, and occasionally the fund with the higher TER is the cheaper one in practice.

Rule of thumb worth keeping: use the TER to shortlist, use the tracking difference to choose. The four-check routine in the article below puts both in their place.