Expense Ratio Calculator

An expense ratio is the annual fee a fund charges, expressed as a percentage of assets. A 1% expense ratio on a $100,000 portfolio costs $1,000 in its first year, and that is the least alarming way to think about it.

The real damage is compounding. Fees do not simply reduce this year’s return. They reduce the base on which every future return compounds. A dollar of fees paid in year one costs you not $1 but every future dollar that dollar would have gone on to generate.

Value without fees: V x (1 + r)^n Value with fees: V x (1 + r - expense)^n

The gap between those two lines widens faster and faster as the years pass. It is not a straight line.

Vanguard’s S&P 500 index fund runs 0.03% per year. Many actively managed mutual funds charge 0.75% to 1.25%. Take a $100,000 investment growing at 8% before fees, held for 30 years:

Moving from the index fund to the active fund costs $236,688 over those 30 years. That is more than twice the original investment, handed over for the extra 0.97% a year. The fund company kept it; you did not.

Notice how little of that gap the first year explains. In year one the extra 0.97% is about $970. The other $235,000 is compounding you never got.

This is why the shift from active funds to index ETFs over the last two decades represents one of the largest wealth transfers from Wall Street to ordinary investors in history. The math was never in dispute. Changing the behavior was the hard part.

One nuance worth knowing: expense ratios never appear on your statement as a line item. They are deducted from the fund’s net asset value daily, invisibly, so you never see a bill. That is exactly why most investors underestimate them.

A caveat on the model. Subtracting the fee from the return is the standard approximation and it is what this calculator does. A fund actually charges on assets, so the precise version is V x [(1 + r)(1 - e)]^n, which is a touch harsher. At the fee levels people argue about the difference is small: on the 1% example above the exact form gives about $744,000 rather than $761,000, so if anything the numbers here understate the cost.