Expense ratios: 0.03% against 1% on $100,000 is $180,000 over 30 years
A fund's fee is deducted every year from the whole balance, whether it went up or down. The difference between a cheap index fund and an expensive active one, compounded, is a quarter of the ending value.
Every fund charges a percentage of the money in it, every year, taken out of the fund's value before the return is reported. The figure is called the expense ratio, it is printed in the fund's documents, and for a broad index fund in 2026 it is commonly between 0.03% and 0.10%. For an actively managed fund it is commonly between 0.5% and 1%. Those numbers look small because they are percentages of the whole balance, not of the return.
The arithmetic
$100,000 invested for 30 years, earning 7% a year before fees. The fee comes off the balance each year, so the net return is 7% minus the fee.
| Expense ratio | Net return | Value after 30 years | Lost to fees |
|---|---|---|---|
| 0.03% | 6.97% | $754,800 | $6,300 |
| 0.50% | 6.50% | $661,400 | $99,700 |
| 1.00% | 6.00% | $574,300 | $186,800 |
$574,300 against $754,800 is a shortfall of $180,500. The fee was 1% a year. The cost was a quarter of the outcome, because a fee taken from the balance every year compounds against the investor exactly as the return compounds for them. The lesson on expense ratios covers the mechanism; this page is the number.
Why 1% of the balance is a third of the return
On a year when the fund returns 7%, a 1% fee is one-seventh of the gain. On a year when it returns 3%, the fee is a third of the gain. On a year when it falls 10%, the fee is still charged, on a balance that has shrunk. Over a long period with an average return of 7%, the fee takes about a seventh of the gross return every year, and compounding turns a seventh of the return into a quarter of the ending value.
What the fee buys
An index fund's fee pays for holding a list of securities and rebalancing to it. An active fund's fee pays for a manager choosing securities in the hope of beating the list. The evidence on whether they do, gathered over decades and published semi-annually by S&P in its SPIVA scorecards, is that most do not over ten-year periods, and that the ones that do are difficult to identify in advance. The fee is certain; the outperformance it is meant to buy is not.
Every other number in a fund's documents — past return, rating, manager tenure — describes the past. The fee describes the future: it will be charged next year, at that rate, whatever happens. It is the one input to a 30-year outcome that is known on the day of purchase, and it is the one most often ignored.
- Where to find it: the fund's summary prospectus, first page, under "Fees and expenses". Also on every fund comparison site.
- What else costs: a 401(k) plan may add an administration fee on top; an adviser may charge a percentage of assets on top of that. The arithmetic above applies to the total.
- What does not appear in the ratio: trading costs inside the fund, and the tax cost of a fund that trades often in a taxable account. Both push the same direction.
Sources
- Mutual fund fees and expensesU.S. Securities and Exchange Commission, Investor.gov · checked Sep 24, 2026
- SPIVA Institutional Scorecard, year-end 2024S&P Dow Jones Indices · checked Sep 24, 2026