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Expense ratios
A small annual percentage, charged on everything, every year. Over a long horizon it is one of the few costs you can control completely.
An expense ratio is the annual cost of owning a fund, expressed as a percentage of the amount invested. It is deducted from the fund's assets rather than billed to you, which is why most people never see it.
Why a small number is not a small cost
The fee applies to your whole balance, every year, including the growth. So it compounds against you in the same way returns compound for you.
Wealth Signal calculation
An illustration, with invented numbers
Take a balance growing at 6% a year for 30 years. At a 0.05% annual fee, the ending balance is about 1.5% lower than with no fee at all. At 1.00%, it is about 25% lower. These figures are arithmetic on assumed inputs — they describe no real fund and are here to show the shape of the effect, which is non-linear.
Take a balance growing at 6% a year for 30 years. At a 0.05% annual fee, the ending balance is about 1.5% lower than with no fee at all. At 1.00%, it is about 25% lower. These figures are arithmetic on assumed inputs — they describe no real fund and are here to show the shape of the effect, which is non-linear.
Why this one is worth caring about
- It is knowable in advance. Almost nothing else about a future return is.
- It is certain. The fee is charged whether the fund does well or badly.
- It is the one variable you fully control. You cannot choose your returns. You can choose your costs.
Fact
Cost is among the most consistent predictors of fund performance
Across the long-running research on fund returns, lower-cost funds have tended to outperform higher-cost ones in the same category — not because cheap managers are better, but because the fee is subtracted from whatever the manager achieves.
Across the long-running research on fund returns, lower-cost funds have tended to outperform higher-cost ones in the same category — not because cheap managers are better, but because the fee is subtracted from whatever the manager achieves.
The other costs, briefly
The expense ratio is not the whole bill. Trading costs inside the fund, the bid-ask spread you pay entering and leaving, and any platform charge all add to it. The published ratio is the floor, not the total.
None of this argues that paying more is always wrong. It argues that paying more should be a decision you made deliberately, for a reason you could state.
Education, not advice. These lessons explain how things work. They do not tell you what
to buy, and Wealth Signal does not publish recommendations. Full disclaimer.