The expense ratio is the annual fee charged by an ETF or mutual fund, expressed as a percentage of assets under management. It covers management, administrative, and operating costs.
Annual Cost = Portfolio Value × Expense Ratio
A small percentage becomes a meaningful sum when it is charged every year. Start with €100,000, assume the investments earn 7% before fees, and leave the money untouched for 20 years.
| Annual expense ratio | Ending value | Fees paid | Fee drag vs no-fee growth |
|---|---|---|---|
| 0.20% | €371,780 | €8,571 | €15,188 |
| 1.00% | €316,504 | €39,066 | €70,464 |
“Fees paid” is the cash removed by the fund. “Fee drag” is larger because it also includes the growth that removed money could have earned.
Assumptions: 7% gross annual return, the fee is deducted once after each year's growth, returns are constant, and there are no taxes, trades, deposits, or withdrawals. Real returns and fee deductions vary, so this is an illustration rather than a forecast.
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