Expense Ratio Impact Calculator Formula
Understand the math behind the expense ratio impact calculator. Each variable explained with a worked example.
Formulas Used
Low-Cost Fund Value
low_cost_value = initial_investment * pow(1 + (annual_return - low_expense) / 100, years)High-Cost Fund Value
high_cost_value = initial_investment * pow(1 + (annual_return - high_expense) / 100, years)Amount Lost to Fees
cost_difference = initial_investment * pow(1 + (annual_return - low_expense) / 100, years) - initial_investment * pow(1 + (annual_return - high_expense) / 100, years)Percentage Lost to Fees
pct_lost = initial_investment * pow(1 + (annual_return - low_expense) / 100, years) > 0 ? (initial_investment * pow(1 + (annual_return - low_expense) / 100, years) - initial_investment * pow(1 + (annual_return - high_expense) / 100, years)) / initial_investment * pow(1 + (annual_return - low_expense) / 100, years) * 100 : 0Variables
| Variable | Description | Default |
|---|---|---|
initial_investment | Initial Investment(USD) | 100000 |
annual_return | Gross Annual Return(%) | 8 |
low_expense | Low-Cost Fund Ratio(%) | 0.05 |
high_expense | High-Cost Fund Ratio(%) | 1 |
years | Investment Period(years) | 30 |
How It Works
The Hidden Cost of Expense Ratios
Expense ratios are annual fees charged by mutual funds and ETFs, expressed as a percentage of assets.
How Fees Compound Against You
Net Return = Gross Return - Expense Ratio
A 1% difference in fees may seem small, but over 30 years it can consume 25%+ of your wealth.
Typical Expense Ratios
Worked Example
$100,000 invested for 30 years at 8% gross return. Compare 0.05% vs 1.0% expense ratio.
- 01Low-cost net return = 8% - 0.05% = 7.95%
- 02High-cost net return = 8% - 1.0% = 7.0%
- 03Low-cost: $100,000 x (1.0795)^30 = $978,000
- 04High-cost: $100,000 x (1.07)^30 = $761,000
- 05Difference = $217,000 lost to fees
Frequently Asked Questions
What is a good expense ratio?
For broad-market index funds, look for ratios below 0.10%. Total US stock market and S&P 500 index funds are available at 0.03%. For actively managed funds, anything below 0.50% is considered reasonable.
Do higher fees mean better performance?
No. Research consistently shows that lower-cost funds outperform higher-cost funds on average. After fees, about 90% of active managers underperform their benchmark index over 15+ years.
Where do I find a fund expense ratio?
The expense ratio is listed in the fund prospectus and on the fund summary page of any brokerage or financial website. It is deducted automatically from the fund value, not charged separately.
Ready to run the numbers?
Open Expense Ratio Impact Calculator