---
title: "Understanding ETF costs: TER, tracking difference and hidden fees"
description: "TER, tracking difference, spread and order fees: which ETF costs really count, why the TD can be smaller than the TER, and how to compare ETFs honestly."
canonical: "https://investboard.de/en/wissen/etf-kosten-ter-verstehen"
language: "en"
published: "2026-07-09"
modified: "2026-07-09"
last_verified: "2026-07-27"
author: "David Bartas"
author_url: "https://investboard.de/ueber-uns"
reviewer: "David Bartas"
reviewed: "2026-07-27"
---

# Understanding ETF costs: TER, tracking difference and hidden fees

Why the total expense ratio is only half the truth, and the tracking difference the more honest figure.

## In short

The TER states a fund's advertised annual running costs; tracking difference is the more honest measure because it captures the actual shortfall against the index over time. Income such as securities lending can make it smaller than the TER. Spreads and order fees still apply to every trade. Compare tracking differences over several years first, then the TER.

- The TER measures advertised running costs, not the actual shortfall against the index
- The tracking difference is the more honest figure and can be smaller than the TER
- Spread and order fees arise additionally on every trade
- Small cost differences compound into large ones over decades

The TER sits large on the factsheet, and many investors choose their ETF by it. Yet it measures only part of the costs, and not the decisive part. The more honest figure sits one line lower and is called the tracking difference.

Once you understand the cost mechanics, you compare ETFs differently: not by the advertised fee, but by what actually goes missing against the index.

> The cheapest fee is worthless if the fund still trails its index. What counts is what arrives.

## What the TER measures

The **TER (total expense ratio)** bundles a fund's running costs: management fees, custodian fees, index licence costs, distribution and administration. It is stated as a percentage per year and is not debited separately; it is taken daily, pro rata, out of the fund's assets. You never see it as a charge, only as a slightly lower return.

What the TER does not contain, despite its name: the fund's own transaction costs when it rebalances, your order fees and spreads when you buy, and taxes at your level.

## Tracking difference: the more honest figure

The **tracking difference (TD)** measures what is missing at the end: the gap between the index return and the fund's actual return over a period.

### Tracking difference

```text
TD = index return − fund return (per year)
```

A TD of 0.15% means the fund trailed its index by 0.15 percentage points per year. That is what you really paid, all fund costs and offsetting effects included.

Notably, the TD can be smaller than the TER, in some cases even negative. Funds earn extra income, from securities lending or from a more favourable withholding-tax treatment than the index assumes, and pass it on to investors. An ETF with a 0.20% TER and a 0.05% TD is in practice cheaper than an ETF with a 0.12% TER and a 0.18% TD.

| Figure | What it measures | Where it lives |
| --- | --- | --- |
| TER | Advertised running costs per year | Factsheet, KID |
| Tracking difference | Actual shortfall against the index | Provider reports, comparison portals |
| Spread | Buy/sell gap on the exchange | Order book, varies by time of day |
| Order fees | Your broker's charges | The broker's price list |

## The costs outside the fund

Two cost blocks arise not inside the fund but with you:

- **Spread:** the gap between buy and sell prices on the exchange. It applies on every trade and is usually small for large, liquid ETFs; at the edges of the day (early morning, late evening) it widens because the US reference markets are closed. Trading around midday, when the home exchanges of the underlying shares are open, is usually tighter.
- **Order fees:** depending on the broker a flat fee, a percentage, or often zero within a savings plan. For small instalments, fixed order fees can be significant in percentage terms.

On top come taxes at your level: distributions, the Vorabpauschale (advance lump-sum tax) and gains on sale, softened by the 30% partial exemption for equity funds. They are not fund costs, but they belong in any honest net view.

## Why small differences grow large

Costs act like a negative return with compound interest. A difference of 0.3 percentage points per year sounds harmless, but over decades it adds up to several percent of final wealth. The ETF savings-plan calculator makes the effect visible if you run two return assumptions separated by the cost difference.

Compare ETFs on the same index first by their tracking difference across several years, not by the TER. With similar TDs, the TER, fund size and tradability decide.

The TER is a promise about costs. The tracking difference is the invoice.

## Checklist for comparing costs

- Compare the tracking difference across several years, not a single year
- Use the TER as the second criterion when TDs are similar
- Mind the spread: trade liquid ETFs during main trading hours
- Check your broker's order fees, especially for small instalments
- Include taxes (partial exemption, Vorabpauschale) in the net view

## Frequently asked questions

### What is the TER of an ETF?

The TER (total expense ratio) bundles a fund's running costs: management, custodian, index licence and distribution. It is stated as a percentage per year and taken daily, pro rata, from the fund's assets rather than charged separately. It does not include the fund's transaction costs, your order fees and spreads, or taxes.

### What is the tracking difference?

The tracking difference is the gap between the index return and the fund's actual return over a period. It measures what you really paid, all costs and offsetting income included. It can be smaller than the TER, for instance through securities-lending income, which makes it the more honest comparison figure.

### How do I compare ETF costs properly?

Compare ETFs on the same index first by their tracking difference across several years; with similar TDs, the TER, fund size and tradability decide. Additionally mind the spread (trade liquid ETFs during main hours) and your broker's order fees, especially for small instalments.

## Sources

- [Verordnung (EU) Nr. 583/2010: wesentliche Informationen für den Anleger (laufende Kosten)](https://eur-lex.europa.eu/legal-content/DE/TXT/?uri=CELEX:32010R0583) · EUR-Lex
- [Trackingdifferences: ETF-Trackingdifferenzen im Vergleich](https://www.trackingdifferences.com/) · trackingdifferences.com
- [InvStG § 20 Teilfreistellung](https://www.gesetze-im-internet.de/invstg_2018/__20.html) · Bundesministerium der Justiz