ETF (exchange-traded fund)
An ETF is an investment fund that trades on an exchange like a share, so it can be bought and sold throughout the session at the market price. Most track an index, which allows an entire basket of holdings to be bought in a single trade and at fees far below active management. What matters before choosing one is not its name but exactly what it tracks, how it tracks it, what ongoing charges it levies, and how far it drifts in practice from the index it follows.
How it is calculated
An ETF has no formula: what matters is knowing what it costs you. The TER is an annual percentage of the amount invested, deducted from the net asset value bit by bit rather than billed separately. On 10,000 € in an ETF with a 0.20 % TER, the cost for the year is 20 €. That sounds small, and it is next to the 1.5 % of an active fund, where it would be 150 €. Over twenty years on the same gross return, that 1.3-point annual gap takes roughly a quarter of the final capital. The TER is the declared part of the cost; the bid-ask spread and the tracking difference against the index are on top.
The figures in the example are invented and rounded so the arithmetic can be redone by hand. They are not data from any real company.
What it is NOT
It is not a share, even though it trades like one: you are buying a basket, not a company. It is not guaranteed either — it tracks an index, and if the index falls it falls with it. And the TER is not everything you pay: tracking difference can add or subtract a few tenths of a point a year against the index it claims to replicate.
See also
TER (total expense ratio) · Liquidity · Market capitalisation
See it on real data
Celsmar computes this from the accounts companies file with their regulator, and shows which line every figure comes from. Free to start, no card.
Definition for informational purposes. It is not financial advice nor a recommendation to buy or sell.