Do ETF fees really matter? How expense ratios shrink your money
A fee of 1% sounds tiny. But over decades, it can cost you hundreds of thousands of dollars. Here's why fees matter so much.
Key points
- An expense ratio is a fund's yearly cost, as a percent of your money.
- Fees come out every year, so you also lose the growth that money would have earned.
- Many index funds charge under 0.10% a year.
What is an expense ratio?
It's what a fund charges each year to run. A 0.03% fee means $3 a year for every $10,000 you have invested. A 1% fee means $100.
You never get a bill. The fund takes a tiny bit out each day, which lowers your returns a little.
How fees add up
Here's $10,000 invested every year for 30 years, with a 10% return before fees:
| Yearly fee | Ending value | Lost to fees |
|---|---|---|
| 0.03% | $1,635,627 | — |
| 0.20% | $1,583,907 | $51,720 |
| 0.50% | $1,496,875 | $138,752 |
| 1.00% | $1,363,075 | $272,552 |
The 1% fee costs about $272,000. You didn't just pay the fee. You also lost all the growth that money would have made.
Where fees hide
- Fund fees (expense ratios). Check the fund's page.
- Advisor fees. Often 0.25% to 1% a year, on top of fund fees.
- 401(k) plan fees. Some workplace plans add their own charges. Look at your plan's fee notice.
- Sales charges ("loads"). Some mutual funds charge when you buy or sell.
Low-cost examples
| Fund | What it holds | Yearly fee |
|---|---|---|
| FXAIX | S&P 500 | 0.015% |
| VOO | S&P 500 | 0.03% |
| VTI | Total U.S. market | 0.03% |
| SCHD | Dividend stocks | 0.06% |
| QQQM | Nasdaq-100 | 0.15% |
Is a higher fee ever worth it?
Sometimes. A good advisor can help you avoid big mistakes, like selling in a panic. That can be worth more than the fee. Just know what you're paying and what you get for it.
A fund with a higher fee isn't automatically better. Most actively managed funds have trailed simple index funds over long periods after fees.
Compare funds and see what each one costs you per year.
Compare fundsQuick answers
What is a good expense ratio?
For a broad index fund, under 0.10% is very good. Many popular funds charge 0.03% to 0.05%.
Are fees taken out of my returns automatically?
Yes. Fund fees are taken out a little each day. The returns you see are already after the fee.
Is a 1% advisor fee too high?
It depends on the help you get. Over 30 years, 1% can cost hundreds of thousands, so make sure it's worth it.
Do ETFs have lower fees than mutual funds?
Often, but not always. Some index mutual funds, like FXAIX, are among the cheapest funds available.
Sources
Keep learning
This article is for learning only. It is not financial, tax or legal advice. Example returns are not promises. Talk to a licensed professional about your own situation.