When comparing ETFs, it is tempting to focus entirely on the headline ongoing charges figure (OCF) shown on a platform's fund page, treating it as the single number that determines how expensive a fund is to hold. In reality, the OCF is only one component of what an investor actually pays. Trading spreads, tracking difference, and other less visible costs can meaningfully affect the total cost of ownership of an ETF, sometimes reversing the apparent ranking suggested by OCF alone. Understanding these components helps UK investors compare funds more accurately, particularly when choosing between several ETFs tracking similar or identical indices.
The ongoing charges figure (OCF)
The OCF represents the annual cost of running the fund, expressed as a percentage of assets, and covers the fund manager's fee along with associated administrative costs such as custody, audit, and regulatory expenses. It is deducted directly from the fund's assets on an ongoing basis, meaning it is already reflected in the fund's published performance and unit price, rather than being billed separately to the investor.
The OCF is a genuinely important figure and, for two funds tracking the same index with a similar approach, is often a reasonable first-pass comparison. However, it does not capture the full picture of what an investor actually experiences.
The bid-offer spread
Because ETFs trade on a stock exchange, buying and selling involves crossing a bid-offer spread — the difference between the price at which the fund can be sold and the higher price at which it can be bought at any given moment. This spread is a real, one-off transaction cost paid at the point of dealing, separate from the ongoing annual OCF.
Why spreads vary
Spreads tend to be tighter for ETFs tracking highly liquid underlying markets, such as major developed-market equity indices, and can be wider for ETFs tracking less liquid markets, smaller or more specialised asset classes, or funds with fewer active market makers. Spreads can also widen temporarily during periods of market stress or outside the core trading hours of the underlying market the ETF references.
For an investor making a single lump-sum purchase and holding for many years, the spread is paid once (on the way in) and again on eventual sale, and its impact is diluted over a long holding period. For an investor trading frequently, however, repeated spread costs can accumulate into a meaningful drag on returns, in a way the OCF figure alone would never reveal.
Tracking difference
Tracking difference measures how closely a fund's actual return, after all costs, matches the return of the index it is designed to follow, over a given period. It is distinct from tracking error, which is a statistical measure of the variability of that difference over time, though the two terms are sometimes used loosely and interchangeably in casual fund commentary.
Why tracking difference can diverge from the OCF
In principle, if a fund's only cost were its OCF, its return would lag the index by roughly the OCF amount each year. In practice, tracking difference can be better or worse than the OCF alone would suggest, for several reasons:
- Securities lending revenue — some funds lend out their underlying holdings to other market participants in exchange for a fee, which can be shared with investors and partially offset the OCF's drag on returns.
- Sampling versus full replication — a fund using a sampling approach (holding a representative subset of an index's constituents rather than every single one) may track its benchmark slightly less precisely than a fund holding every constituent in exact proportion.
- Withholding tax efficiency — as discussed elsewhere, a fund's domicile and structure can affect how much withholding tax is recovered on dividends from underlying holdings, which feeds into the net return actually delivered.
- Rebalancing and transaction costs — funds incur trading costs when index constituents change or when funds flow in and out, and how efficiently a manager handles this can affect tracking difference.
- Cash drag — holding small amounts of uninvested cash for operational reasons can create a very minor difference in returns compared with a fully invested benchmark.
A fund with a genuinely well-run tracking process can, in some periods, deliver a return very close to — or in rare cases exceeding — its benchmark despite its OCF, while another fund with an identical OCF might lag by noticeably more due to less efficient implementation.
Putting the three components together
| Cost component | When it's paid | What it reflects |
|---|---|---|
| OCF | Continuously, deducted from fund assets | Management and administrative fee |
| Bid-offer spread | At the point of buying or selling | Trading cost, linked to underlying market liquidity |
| Tracking difference | Reflected cumulatively in long-term performance | How efficiently the fund actually delivers the index's return net of all costs and offsetting income |
Total cost of ownership is best thought of as the combination of all three: the recurring OCF, the one-off spread paid on each trade, and the real-world tracking difference observed over time, which in effect captures the net impact of the OCF alongside various offsetting or additional factors. None of these three components should be viewed entirely in isolation, since a fund that appears attractive on one measure can look considerably less so once the other two are taken into account, and a fund's ranking against its peers can shift depending on which combination of measures an investor weights most heavily for their own circumstances.
A worked example
Suppose an investor is choosing between two hypothetical ETFs tracking the same global developed-market equity index. Fund A has an OCF of 0.12% and a typical bid-offer spread of 0.05%. Fund B has a lower headline OCF of 0.08% but a wider typical spread of 0.15%, and over the past three years its published tracking difference shows it has lagged the index by an average of 0.20% a year, compared with Fund A's average lag of 0.10% a year.
For a long-term buy-and-hold investor making one purchase and holding for ten years, the one-off spread difference is a very small factor spread over a decade, while the tracking difference gap compounds every year. Over that holding period, Fund A's lower observed tracking difference could plausibly result in a better net outcome than Fund B's lower headline OCF alone would suggest — despite Fund B appearing "cheaper" on the single OCF figure most platforms display prominently. This example uses hypothetical figures purely to illustrate the principle, not to predict any real fund's actual costs or performance.
Where to find this information
- The OCF is published in the fund's Key Investor Information Document or equivalent UK disclosure document, and on most platform fund pages.
- Bid-offer spreads can be observed directly on a platform's live dealing screen, ideally checked at more than one time of day.
- Tracking difference is often published by the fund provider itself, comparing the fund's return against its benchmark index over various periods, and can also be checked independently using published fund and index performance data.
- Fund fact sheets typically disclose whether the fund uses physical or synthetic replication and whether it engages in securities lending, both of which are relevant context for interpreting tracking difference.
Why this matters more for some investors than others
The relative importance of each cost component depends heavily on an investor's own behaviour. An investor making regular monthly contributions and rarely trading will experience the OCF and tracking difference as the dominant ongoing costs, since spread is paid only occasionally and in modest amounts. An investor trading more frequently, or moving large sums in and out of a fund, will find the spread becomes proportionally more significant. Neither pattern is right or wrong; understanding which cost components matter most for one's own likely trading pattern simply helps focus comparison effort where it will actually make a difference.
Platform charges as a fourth layer
Beyond the fund's own costs, UK investors should also factor in whatever their chosen investment platform charges to hold and trade the ETF, since this sits entirely outside the fund itself and varies considerably between providers. Some platforms charge a flat annual fee, others a percentage of assets held, and dealing charges for buying and selling shares and ETFs also differ from provider to provider, sometimes with different pricing for regular monthly investing compared with one-off lump-sum trades. None of this is part of the ETF's own OCF or tracking difference, but it is very much part of what an investor actually pays overall, and for smaller portfolios a platform's percentage or flat fee structure can, in some cases, outweigh the difference between two competing ETFs' OCFs entirely. A genuinely complete cost comparison therefore looks at the fund's OCF, spread, and tracking difference alongside the platform's own charging structure for holding and dealing in that fund, particularly when the same ETF is available to buy on several different platforms at different effective costs.
Key takeaways
- The ongoing charges figure (OCF) is an important but incomplete measure of an ETF's true cost.
- The bid-offer spread is a real, one-off transaction cost paid when buying and selling, separate from the annual OCF.
- Tracking difference measures how closely a fund's actual net return matches its benchmark, and can be better or worse than the OCF alone would suggest, due to factors such as securities lending income and replication method.
- Comparing two ETFs tracking the same index solely on headline OCF can be misleading if spreads or tracking difference differ meaningfully between them.
- Total cost of ownership combines OCF, spread, and observed tracking difference, and its relative weighting depends on an investor's own trading frequency and holding period.
- Fund fact sheets and published performance data are the primary sources for checking all three components before comparing similar ETFs.