The term TER in ETF trading stands for Total Expense Ratio. It is all about the expenses the ETF provider is charging to a particular ETF trader while buying an ETF. Looking at TER from another point of view: The TER we will pay as ETF investors is the gross margin for the ETF provider.
What kind of costs are included in a TER?
First and foremost the cost of making or creating the ETF is covered. An ETF is not falling out of the sky, it has to be composed and the cost of creation is covered in the TER. Another major part consists of managing the ETF. The cost of management is also included in the TER.
Marketing and promotion are other things to be considered. After creating a new ETF this ETF has to be made public so we investors know it exists. Marketing and promotion of an ETF is also covered in the Total Expense Ratio of an ETF. Besides other costs of course it also represents the margin of an ETF provider.
TER lower than expected with ETF’s
When you think of all the costs that must be covered you would guess that an ETF would become a bit expensive. The opposite is true. To handle and manage an ETF less people are required than managing an investment fund. That is why an ETF offers much lower costs that is reflected in a relatively low TER.
What you should also keep in mind is that ETF’s are sold in large quantities. The total cost of TER is shared among many investors. That is why you as a single investor is only paying a very small percentage in TER.
For some ETF’s TER may be a bit higher
An ETF that is aimed at a niche market may have a higher TER because of the lower demand for that ETF. It is always a bit difficult to create an ETF for some niche markets and you will be quoted a higher TER. I myself am not deterred of buying an ETF with a slightly higher TER as it is always relative to the possible returns in that market.