ETF cost comparison
Two funds with the same return before fees. The only difference is the expense ratio, compounded over the years you choose.
$162,723
by choosing 1.50% over 0.07% across 30 years
$493,441
Fees paid: $3,914$330,718
Fees paid: $64,781Assumes 8% annual market return before fees. Actual returns vary. This illustrates the drag of expense ratios on long-term wealth.
What ETF fees and expense ratios actually cost
A 0.2% TER and a 1.5% TER look close on a fact sheet. Over 30 years they are not close: the fee is charged on the whole balance, every year, so the money it removes never gets the chance to compound.
The fee is charged on the balance, not on what you paid in
An expense ratio is deducted from the fund’s assets continuously, so you never see a bill: the share price simply grows by less. That is why the drag compounds. In the first year a 1.5% fund costs 1.5% of your money; in year 30 it costs 1.5% of a much larger balance.
Put €10,000 into a fund returning 7% a year before costs. At a 0.2% expense ratio it ends near €71,968 after 30 years. At 1.5% it ends near €49,840. The difference, about €22,128, is not a fee you were charged once. It is 30 years of compounding that happened on the fund company’s side of the ledger instead of yours.
What “cheap” means for an index fund
Broad equity index funds are a commodity, and their prices reflect that: the cheapest European and US index ETFs sit between 0.03% and 0.25%, while actively managed funds typically charge 0.5% to 1.5%. Paying 1% for a fund that tracks the S&P 500 is not a small difference — it is most of the expected real return of a decade.
The TER is not the whole cost, though. In Germany you also pay depot fees (often 0–0.3% a year), order fees (often €0–€10 per trade, and some brokers waive them on savings plans) and the spread. US investors should look at the fund’s expense ratio plus any 401(k) recordkeeping fee, which is charged separately and does not appear in the ratio.
The number that beats the TER: tracking difference
A fund’s TER tells you what it promises to charge. Tracking difference tells you what it actually cost: the gap between the index return and the fund return over a year. A 0.10% TER fund with a −0.35% tracking difference was more expensive than a 0.20% fund that tracked at −0.22%, because of tax treatment, withholding, sampling or securities lending.
Check both before choosing between two cheap funds. The Basisinformationsblatt (KID) in the EU also shows a single “costs over one year” figure that bundles the one-off and ongoing charges, which is a faster comparison than reconstructing the TER by hand.
Common questions
- Do ETF fees compound?
- Yes. The expense ratio is deducted from the fund’s assets every year, so the amount removed grows with the balance, and none of it compounds for you. That is why a 1% difference in costs can remove a fifth of a 30-year result.
- Is a 0.5% expense ratio high?
- For a broad, passively managed index fund, yes. Comparable funds are available at 0.03–0.25%. For a niche or thematic fund with higher trading and research costs, 0.5% can be normal — the question is whether the exposure is worth it.
- What is the difference between the TER and the total cost?
- The TER covers the fund’s ongoing management and administration. It excludes the broker’s depot and order fees, the bid-ask spread, taxes and — in the EU — the portfolio transaction costs that the PRIIPs KID reports separately. Your real cost is the sum of all of them.
- Are cheap ETFs always the better choice?
- No. Cost is the most reliable predictor of relative performance among funds tracking the same index, but it tells you nothing about whether the index itself suits your horizon. Compare cost only after the exposure is right.