The Real Cost of Investing in ETFs and Its Long-Term Effects
What you actually pay
ETF costs fall into two broad categories. Trading costs are incurred when the investor buys or sells: commissions, bid-ask spreads, FX (foreign exchange) conversion and exchange fees. Holding costs come from owning the position, most importantly the ETF’s TER (Total Expense Ratio) and, where applicable, a platform fee. The two behave differently: trading costs depend on the size and frequency of transactions, while holding costs accumulate over the time the investment is held.
The timeline below shows when each type enters the bill: trading costs at purchase and sale, and holding costs throughout the holding period.
What’s inside a trade
Many brokers now advertise commission-free trading, but the trade still carries a cost the investor never sees on a statement. The largest piece is the bid-ask spread. At any moment an ETF has two prices: a higher one at which the investor can buy (the ask) and a lower one at which they can sell (the bid). Whoever buys at the ask and later sells at the bid gives up that gap: roughly half of it when buying, the other half when selling, embedded in the execution price rather than itemized anywhere.
Schwarz et al. (2025), in the Journal of Finance, found that the average cost of buying and immediately selling a stock at major US retail brokers ranged from 0.07% to 0.46% with no commission charged. That figure is spread and execution quality alone, and it varies by broker. None of it appears on a statement.
Brokers that do charge commission make the costs explicit instead. Commissions are usually a percentage of trade value, say 0.10%, subject to a minimum fee per trade that can dominate the cost on small trades. Exchange and regulatory fees are modest charges from venues and regulators.
Those apply to any trade. A trade in a foreign currency adds one more charge: FX conversion costs. When the account is funded in EUR and the investor buys a USD-priced ETF, the broker converts EUR to USD at a rate that includes its own margin. Competitive EU discount brokers sit in a 0.03%–0.25% band: IBKR around 0.03% on auto-conversion, Trade Republic and Trading 212 around 0.15%, DEGIRO at 0.25%. Traditional banks and full-service brokers run 0.5%–1.0%. At a bank, on a non-EUR trade, the FX markup usually costs more than the commission itself. Many ETFs trade on European exchanges in more than one currency, so the investor can often avoid FX costs entirely by buying a listing denominated in their account’s own currency.
Why small trades are expensive
A minimum fee creates a fixed cost regardless of trade size. A 0.1% commission on a €100 order would be only €0.10, so a broker with a minimum charge will collect the minimum instead. IBKR’s European equity commission is 0.05% of trade value but never less than about €1.25; DEGIRO charges a flat €1 on its core ETF selection and €3 elsewhere; Trade Republic charges €1 per manual trade. Zero-commission brokers like Trading 212 charge nothing per trade and recover costs through other parts of the trading service, including the spread and FX markup.
The minimum is a floor, so the investor pays whichever is larger. On a large trade the percentage exceeds the floor and the investor pays the percentage; on a small trade the percentage shrinks below the floor and the investor pays the minimum. The smaller the trade, the larger a share of it that fixed minimum represents, so the effective cost rate rises as order size falls.
Take a broker charging 0.3% with a €3 minimum. A €5,000 trade costs €15, while a €100 trade costs the €3 minimum — 3% of the trade rather than 0.3%. The crossover is €1,000, where 0.3% equals €3; below that point, the effective cost rises as the order gets smaller.
Estimating your trading costs
Industry averages are useful for orientation, but the number that belongs in a long-horizon projection is the investor’s own cost per trade. It can be worked out in advance, from the broker’s fee schedule and a live quote, without waiting for a trade confirmation.
What matters for FX is the trading currency of the share class: the specific listing an investor buys, which can differ by currency and exchange even though the underlying holdings are identical. The iShares Core S&P 500 UCITS ETF trades as SXR8 on Xetra in EUR and as CSPX on the London Stock Exchange in USD. Same basket of stocks, different ticker, different trading currency, different cost to the investor.
| Component | SXR8 (EUR, Xetra) | CSPX (USD, LSE) |
|---|---|---|
| Commission | 0.10% | 0.10% |
| Half-spread | 0.03% | 0.03% |
| FX markup (EUR → USD) | 0.00% | 0.15% |
| Total cost | ~0.13% | ~0.28% |
Roughly twice the cost for the USD share class, paid on every contribution and every rebalance for the life of the plan. Both share classes track the same index. For an investor whose account is in euros, SXR8 is the cheaper way to access it.
The table describes one specific setup: a percentage-fee discount broker, a moderately sized order, and one of the most liquid ETFs in Europe. The 0.10% commission is toward the upper end of percentage-fee discount brokers; IBKR’s tiered pricing runs closer to 0.05%. Flat-fee brokers such as Trade Republic or DEGIRO’s core ETF selection charge a fixed €1 instead, which is 0.01% of a €10,000 order but 1% of a €100 order. SXR8’s round-trip spread runs 0.05%–0.07% per the Xetra Liquidity Measure, making 0.03% a reasonable half-spread estimate. The 0.15% FX markup applies only when the trade crosses currencies.
Under those conditions, a trade costs about 0.13%, close to the lowest a European retail investor can realistically achieve, because every input in the example works in the investor’s favor: a cheap broker, a highly liquid fund, no currency conversion, and a reasonably large order. A typical portfolio won’t have all of those advantages at once. It holds several ETFs, and some trade far less actively than SXR8: funds for small companies, emerging markets, or narrow bond segments change hands less often, so the gap between their buy and sell price is wider, and the one-way spread alone can reach 0.10%–0.25%. A plan funded through monthly contributions also places small orders, where the broker’s fixed minimum takes a larger bite of each trade.
Looking across those cases, from the cheapest realistic trade near 0.13% to less liquid funds and small orders well above it, 0.3% per trade is a reasonable default for a European retail investor running a multi-ETF portfolio through an EU discount broker with no FX. Take it higher if foreign currency is involved or the broker is a bank; lower for a single liquid holding traded in larger orders. And when precision matters, replace the default with the investor’s own number, built exactly as in the table: the broker’s commission, plus half the quoted spread, plus any FX markup.
Holding costs: the TER
Everything above is paid when a trade happens. The other side of the bill comes from owning the ETF: the fund’s own fee, the Total Expense Ratio (TER), which every ETF investor pays.
The TER is the annual percentage the ETF manager deducts to run the fund, covering operational costs. It is quoted as an annual rate but applied continuously, with the Net Asset Value (NAV) trimmed by a small amount every business day so that the cumulative deduction across the year equals the TER. Nothing shows up on a statement because the cost is taken from the fund’s price before that price is quoted. For broad index ETFs the TER typically runs between 0.05% and 0.5% per year; the average equity UCITS ETF charges around 0.3%.
The TER is not the whole cost of running a fund. Smaller items can also affect returns, including the fund’s internal trading costs, tracking difference and withholding taxes on dividends received. For a broad index ETF these are secondary, but they explain why the TER is not necessarily identical to the fund’s total drag. The TER remains the main number to compare funds by.
Holding costs: the platform fee
Managed portfolios carry a second type of holding cost. Picking ETFs and deciding when to rebalance is work not every investor wants to do. A robo-advisor does it for the investor: it builds an ETF portfolio to fit the investor’s risk tolerance, rebalances it over time, and charges for it. The price is an annual percentage of the portfolio’s value (labeled a management fee, advisory fee, or service fee depending on the provider), deducted continuously, like a second TER on top of the first. European robo-advisors typically charge 0.25%–1.0% per year, on top of the underlying ETFs’ TERs.
The platform fee and the TER are separate charges paid to separate parties. The fund company takes its TER out of the NAV. The platform takes its fee out of the account. Run a portfolio with a 0.20% average TER through a platform charging 0.75% and the total continuous drag is 0.95% per year, before any trading costs. The investor can cut the TER by choosing cheaper funds, but the platform fee is fixed regardless.
A statement won’t always present one clean number. Some platforms quote a single figure; others split management, service and custody charges across several lines. For a like-for-like comparison, add the annual TER and platform fee. Trading costs sit on top and should be estimated separately because they depend on how often and how much the investor trades.
How it compounds
A 1% annual cost over 25 years subtracts more than 20% from terminal wealth because of compounding. The fee paid in any given year is no longer invested to compound in the years that follow, and over a 25-year horizon that forgone growth far exceeds the sum of the fees themselves.
€10,000 growing at 5% a year before costs ends between roughly €33,000 at 0.10% and €23,600 at 1.50%, a €9,400 spread. At 0.30% — around the average ongoing charge for an equity UCITS ETF — it ends at about €31,500. At 1.40%, the average for an actively managed equity UCITS mutual fund, it ends at about €24,200.
The same compounding effect also explains why the gap between ETF and active-fund costs matters. The ESMA 2025 report puts the average ongoing charge for an equity UCITS ETF around 0.3% and the average for an actively managed equity UCITS mutual fund around 1.4%. A difference of more than a percentage point each year compounds into a substantial gap in terminal wealth.
The shape of the curve also shows why the two cost types respond to different decisions. Holding costs matter more the longer the horizon: over a year, a small difference in annual fees may be barely visible, but over decades it compounds into a substantial gap in terminal wealth. Trading costs matter more with turnover: a plan that rebalances quarterly with small trades pays the trading toll many times, while a plan that rebalances annually with larger trades pays it less often.
Most of these costs are choices. The holding bill follows from the funds and, if applicable, the platform the investor chooses. The trading bill follows from the broker, share class, order size and trading frequency. A broker’s headline commission alone therefore understates the real cost of investing over a long horizon.
References
Deutsche Börse. Xetra Liquidity Measure (XLM). https://www.xetra.com/xetra-en/trading/market-quality/xlm-xetra-liquidity-measure
European Securities and Markets Authority (2025). Market Report on Costs and Performance of EU Retail Investment Products 2025. https://www.esma.europa.eu/
Schwarz, C., Barber, B. M., Huang, X., Jorion, P., & Odean, T. (2025). The “actual retail price” of equity trades. The Journal of Finance, 80(5), 2507–2541. https://doi.org/10.1111/jofi.13467
Trading 212. FX fee on Invest accounts. https://helpcentre.trading212.com/hc/en-us/articles/360018909758