The question
"A fund charges 0.75% a year. That's less than 1%. Why would it matter?"
The idea
- A fund's yearly fee is its expense ratio: the percent of your money the fund keeps each year to run itself. It comes quietly out of the fund's value, so you never see a bill.
- The fee looks tiny because it is a small slice of one year. But it comes out every year, and every dollar it takes can no longer grow. Over decades, a small yearly gap becomes a large gap in what you end up with.
Worked example
We need a yearly return. We'll borrow a real one: SPY, an S&P 500 fund, grew 10.7% a year on average from Jan 29, 1993 to Nov 10, 2026, with dividends put back in. We'll treat that as the return before fees, arriving every year. Real returns jump around; this is a what-if.
Two fees:
- 0.03%: what VOO and IVV, two S&P 500 funds, charge.
- 0.75%: not rare. Of 5,101 US ETFs with a stated fee, 1,730 charge 0.75% or more.
Step 1. Subtract each fee from the return.
- 10.7% − 0.03% = 10.67% a year
- 10.7% − 0.75% = 9.95% a year
Step 2. Year one on $10,000:
- Fee: $10,000 × 0.03% = $3, against $10,000 × 0.75% = $75
- Growth: $10,000 × 10.67% = $1,067, against $10,000 × 9.95% = $995
A $72 gap. Easy to ignore.
Step 3. Let it run 30 years. Each year's growth is added on, and the next year grows on the bigger total. That is compounding: growth on top of growth. Here's how it works: $10,000 × (1 + yearly return)³⁰, where the small 30 means "multiplied by itself 30 times":
- $10,000 × 1.1067³⁰ = about $209,400
- $10,000 × 1.0995³⁰ = about $172,100
Step 4. The gap is now $37,200, about 18% of what the low-fee fund ended with. A fee gap of 0.72 percentage points (0.75 minus 0.03) cost far more than 0.72% of the money, because it also took the growth those dollars would have earned.
The common mistake
"It's less than 1%, so it's small." People compare the fee with their whole balance, once. Compare it with your growth, every year. In year one, the 0.75% fee took $75 of about $1,070 in growth, roughly 7% of what the money earned. Over 30 years, with each lost dollar no longer compounding, that becomes $37,200. A higher fee can be worth paying if a fund does something a cheaper one can't, but the fee is the one cost you know in advance.
Check your understanding
Pick an answer to see why. Two of three right passes the lesson.
1. What is an expense ratio?Answer: B. The percent of your money a fund keeps each year to run itself. it is a yearly fee, taken from the fund's value. Not A: it comes out every year you own the fund, not once, which is why it adds up.2. On $10,000, how much is a 0.75% fee in the first year?Answer: C. $75. $10,000 × 0.0075 = $75. Not B: $7.50 would be 0.075%, a tenth of the fee.3. Two funds own the same stocks. One charges 0.05% and the other 0.50%. Over 30 years, the gap in ending balances will be:Answer: B. Much more than 0.45%, because the fee also removes the growth on those dollars. the fee gap compounds like returns do. Not A: 0.45% is the gap for one year only.
Takeaways
- Read the expense ratio first on a fund page. It's the one cost you know in advance.
- Compare fees with your growth, not your balance, and multiply by the years you'll keep it.
- For funds that own the same thing, the fee is often the whole difference.