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What does a 1% fee really cost?

Two funds earn the same returns before fees. One charges more. Watch the gap between them grow, year after year.

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A fund's annual fee (its expense ratio) is taken as a share of your balance, every year, whether the fund went up or down. Here each year's growth is multiplied by (1 − fee):

net yearly growth = (1 + return) × (1 − fee) − 1

Then the balance is built exactly like the compound growth calculator: monthly steps, deposits at the end of each month.

  • “What the higher fee costs you” is the low-fee balance minus the high-fee balance at the end.
  • “Share of the no-fee result” compares the high-fee balance with the same money and returns at zero fees.
  • Real funds take the fee a little each day; over a year the difference from this method is a rounding error.
  • Not included: trading costs inside the fund, sales loads, advisory fees and taxes. Those come on top.

What an expense ratio is

A fund's expense ratio is the yearly fee it charges as a share of the money you have in it. A 1% fee on $100,000 is $1,000 that year, whether the fund went up or down. You never see a bill; it comes out of the fund's value.

Why 1% is not small

The fee is charged on the whole balance, including all the growth from earlier years, every year. Over decades the money that leaves also stops compounding for you. With the starting example ($10,000 plus $300 a month at 7% before fees), the gap between a 0.05% fund and a 1% fund after 30 years is about $77,389.

What it leaves out

Trading costs inside the fund, sales charges (loads), advisory fees on top of the fund, and taxes. If you pay an adviser 1% plus fund fees, add them together.