How expense ratios drag returns
A fund fee is charged on the whole balance every year, so it comes off the rate your money compounds at. Start with $10,000, add $300 a month for 30 years at 7 percent before costs: with no fee you reach $447,156.27, and a 0.65 percent fee leaves $389,198.79.
Ending balance after the fee
$389,198.79
The same money with no fee taken reaches $447,156.27.
- What the fee costs
- $57,957.49
- Cost as a share of the fee-free balance
- 12.96%
- Return left after the fee
- 6.35%
- You paid in
- $118,000.00
A fund's published return is already net of its expense ratio. Put the figure before costs here, or put the published one here and set the fee to zero. This rate is applied in twelve monthly slices, so 7 here compounds to 7.23 percent over a year.
On this page
In short
- The fee is subtracted from the return, not from the gains. A 7 percent return with a 0.65 percent expense ratio compounds at 6.35 percent.
- Start with $10,000, add $300 a month for 30 years at 7 percent before costs, monthly compounding. You pay in $118,000. With no fee the balance is $447,156.27.
- The same money at 0.65 percent leaves $389,198.79. The gap is just under 13 percent of the fee-free balance, because the missing rate never compounded.
- At 0.10 percent the same plan ends at $437,630.90. A 0.55 point fee cut recovered most of what 0.65 percent took.
- A published fund return is already net of the expense ratio. Subtracting the fee from a published figure charges it twice.
The fee comes off the rate, not off the gains
An expense ratio is a percent of the whole balance, taken whether the year was up or down. It is not a percent of the profit. On a teaching sheet it is subtracted from the return before anything compounds:
Seven percent before costs with a 0.65 percent fee is 6.35 percent. The expense ratio calculator on this page compounds that net rate monthly, with a starting balance and a monthly deposit.
Start with $10,000, add $300 at the end of every month for 30 years, 7 percent before costs. You pay in $118,000. With no fee the balance is $447,156.27, of which $329,156.27 is growth. With a 0.65 percent fee the balance is $389,198.79, of which $271,198.79 is growth.
The fee did not take 0.65 percent of $447,156.27. It took a slice of the rate, every month, for 30 years, and the missing rate never compounded. That is why the dollar gap is much larger than 0.65 percent of the ending balance.
Investment fees and drag is the wider argument. This page is the one identity, with three ending balances on one sheet. Index funds against active management is what the fee is often paying for, or not.
A cheaper fund on the same return
Keep the $10,000, the $300 a month, the 30 years and the 7 percent. Move the fee to 0.10 percent. The net rate is 6.90 percent. The balance is $437,630.90, of which $319,630.90 is growth.
Set the three endings beside each other: $447,156.27 with no fee, $437,630.90 at 0.10 percent, $389,198.79 at 0.65 percent. The cheaper fund gives up about 2.1 percent of the fee-free balance. The 0.65 percent fund gives up just under 13 percent. A difference of 0.55 points in the quoted fee is doing all of that.
This is not an argument that the cheaper fund is always ahead. It is an argument that the fee is the part known in advance, charged on the whole balance, and it compounds.
Three endings on one sheet are three points. The fee drag explorer lets you drag the fee itself and watch the gap from the fee-free line grow, which is this identity as a picture.
Published returns are already net
A reported total return is net of the expense ratio. The price you see is already after the daily slice. Enter a return before costs here, or enter a published net return and set the fee to zero. Doing both subtracts the same fee twice.
The 7 percent on this page is a yearly rate applied in twelve monthly slices, so it is not quite an annualised return. The CAGR calculator is the page that turns a start and an end into a rate. This page holds the rate still and moves the fee.
What this page is not doing
It is not a fund screen, not a tax model, and not a claim that 7 percent will show up. The three sheets are $10,000 plus $300 a month for 30 years at 7 percent: no fee ($447,156.27), 0.65 percent ($389,198.79), and 0.10 percent ($437,630.90). This is educational material, not financial advice.
Worked examples
A 0.65 percent fee held for 30 years
You put $10,000 into a fund, add $300 at the end of every month for 30 years, and the fund earns 7 percent a year before costs, compounded monthly. The expense ratio is 0.65 percent. What do you end with?
- Take the fee off the return: percent, so the balance compounds at 0.0635 a year.
- Find the monthly rate: , which is 0.00529167 to eight decimals, and count the periods: . Every figure below carries the rate unrounded.
- Grow the opening amount: , which is $66,857.43.
- Grow the deposits: , which is $322,341.35.
- Add the two parts. Together the $66,857.43 and the $322,341.35 come to $389,198.79, and adding the rounded halves on their own would land a cent low.
- Check what you paid in: $118,000.
You end with $389,198.79. You paid in $118,000, so $271,198.79 of that balance is growth rather than money you supplied.
The same money with no fee taken
Run the identical $10,000 and $300 a month for 30 years at the full 7 percent compounded monthly, with nothing deducted. What is the fee-free balance?
- The balance now compounds at 0.07, so the monthly rate is , again carried unrounded.
- , against 6.685743 once the fee was taken.
- Grow the opening amount and the deposits at that rate and add them: the balance is $447,156.27.
- Subtract what you paid in: $447,156.27 minus $118,000.
With no fee the balance is $447,156.27, of which $329,156.27 is growth. That is the figure the 0.65 percent run is measured against, and the fee has cost just under 13 percent of it.
The same question at 0.10 percent
Keep everything else the same and move to a fund charging 0.10 percent instead of 0.65 percent. What does the cheaper fund end with?
- The return left after the fee is percent, so the monthly rate is .
- , between the 6.685743 of the expensive fund and the 8.116497 of the fee-free run.
- Grow the opening $10,000 and the $300 monthly deposits at that rate: the balance reaches $437,630.90.
- Set it beside the other two: $447,156.27 with no fee at all, and $389,198.79 at 0.65 percent.
The cheaper fund ends at $437,630.90, of which $319,630.90 is growth. It gives up about 2.1 percent of the fee-free balance where the 0.65 percent fund gives up nearly 13 percent, so roughly a sixth as much. A difference of 0.55 percentage points in the quoted fee is doing all of that.
Common questions
Is a fund's published return already after the expense ratio?
Yes. A reported total return is net of the expense ratio, so subtracting the fee from a published figure charges it twice. Enter a return before costs here, or enter a published net return and set the fee to zero.
Is the cheaper fund always the better one?
No. What you keep is the return after every cost, and a fund charging more can leave you ahead if it earns more than the difference. The fee is the part known in advance. On this sheet, 0.10 percent ends at $437,630.90 against $389,198.79 at 0.65 percent, because the return before costs was held still at 7 percent.
When is the fee actually taken?
A slice comes out of fund assets each day the fund is valued, so no bill arrives and the price you see is already net of it. This calculator does the same thing once a month, by reducing the rate from 7 percent to 6.35 percent on the 0.65 percent sheet.
Keep reading
This page is educational material, not financial advice. The figures come from the formula shown and assume the inputs you enter hold for the whole term. Your own rate, fees, taxes and timing will differ, so treat the output as arithmetic to check a decision against, not as a recommendation.