Expense Ratio

The Annual Fee a fund charges to run itself, expressed as a percent of assets.

Most people, when investing, only want to look at the return. How much has this fund grown in one year, five years, or its lifetime? There are several types of fees that can show up when buying investments, such as commissions, advisor fees, account fees, or expense ratios.

Thanks to the Robinhood affect, most brokerages removed commission fees from trades, unless you do a “professional” amount of trades daily. The standard advisor fee is usually around 1%, but why would you pay someone 1% of your future to put your money in index funds? Account fees are rarely seen in private brokerage accounts these days, but are usually a baked-in portion of your 401(k) with your employer.

That leaves us with the expense ratio. This is the cost of running the fund. This money is taken out of the fund’s return, not billed to you as a line item. It covers the manager, custody, and paperwork. This is a very important thing, as the difference can mean a lot of money over time.

Example: A 0.03% expense ratio on $10,000 = $3 per year. A 0.09% expense ratio = $9 per year. On a $100,000s that’s $30 vs $90, on $1 Million it’s $300 vs $900.

Many years ago, places like Vanguard and Fidelity had lower expense ratios on their higher level funds. Vanguard’s basic index fund (now defunct) had a 0.14% expense ratio, which was very low at the time, but it’s Admiral share version of the same fund ($10,000 minimum) was 0.04%. Over time, to compete with companies like Robinhood, the ETF versions of these index funds, such as VOO (S&P 500 ETF), have had to come down to match the market, which is why it has a 0.03% ratio instead of the 0.04% ratio of VFIAX (S&P 500 Admiral Fund).

Since I base these articles off of my own Investment Policy Statement, I checked VTI (Vanguard Total US Stock Market Fund), VXUS (Vanguard Total International Fund), and VOO. The ETFs seem to mostly be within one hundredth of a percent except on the international fund. My Admiral shares were at 0.09% vs the ETF version’s 0.05%.

That’s a huge difference — $9 vs $5 for every $10,000. It’s almost double! It is, however, important to make sure that when you check these things, that the funds you compare are comparable. An S&P 500 should be pretty much the same at every brokerage, but other index funds might not me.

Also, because here we love math: That expense ratio difference is almost $700 over 30 years, per $10,000.

When we match that with the Rule of 72, we know that $10,000 is $20,000 in 7.2 years, and $170,000 in 30 years. Which means sticking with 0.09% instead of 0.05% costs ~$1,900 of ending wealth per $10k started, over 30 years at 10%. That’s 19% of your initial $10,000; it’s also 1.1% of the ending balance. Now imagine that was a capped $401k each year, instead of a flat $10,000. Simply changing from one version of a fund to another version of the same companies could save you thousands.

In 1996, the 401k capped at $9,500; in 2025, it was $23,500. The cumulative total would be $477,500 contributed — an ending balance of $2.3 million, with $16,900 gained from fees saved. That doesn’t feel like a lot, but would you save $17,000 with one exchange click in your Vanguard portal? I would, I converted all my VTIAX to VXUS yesterday.

~~Miniwing~~
Investor, Stoic, Penny-pincher