Investing · General financial education

TER vs tracking difference

TER (total expense ratio) is a figure for ongoing fund costs. Tracking difference is how far the result drifted from the index. Those are not the same number.

In more detail

A low TER says: this cost block is small. Spreads, taxes, sampling, cash and lending can still make the gap larger, or, less often, smaller. So you check both figures instead of reading TER as the result.

Background

Supervisory statistics often use TER as a proxy for ongoing costs; that does not replace the observed gap to the index. Tracking error (how jumpy the gap is) is again different from tracking difference (the size of the gap over a period). Neither figure is a quality seal or a product recommendation.

An example

Suppose the index rises 8.00% in a year, the fund 7.40%, and TER is 0.20%. Tracking difference is −0.60 percentage points: more than TER. That is a reading example, not a fund verdict.

A common misconception

Low TER = the product is good and tracks the index tightly.

TER is a cost block. Tracking difference is the gap result. Both are readable; neither is a buy seal.

Source: ESMA · Investor Corner. Version 0.2.0. Finmon explains. It does not advise. Not investment, tax or legal advice.