What does a fund's fee actually take from you?

A fund's headline fee is the expense ratio: the share of the fund's assets taken each year to pay the manager, the custodian, the index licence and the administration. It is quoted as a percentage a year and taken continuously, a sliver a day, from inside the fund. You never see a bill, which is why it is the most underestimated number in investing.

The measured range

Read on 2026-09-04 from each fund's published record, as percentages a year:

A thirty-five-fold spread between the cheapest and the dearest, on the same list of mainstream funds. Actively managed funds commonly sit at 0.5% to 1.5%, and some hedge-fund-style products charge more again plus a share of gains.

Why a small number is not small

The risk-and-return course did this sum once and it bears repeating with real fees. Take the same 7% gross return for forty years on €10,000:

• at 0.03% a year, the fund keeps about 98.9% of the end value it would have had with no fee at all;
• at 0.75%, it keeps about 75% — a quarter of the final wealth went to the fee;
• at 1.5%, it keeps about 57%.

The fee compounds with exactly the same curve as the return, only against you. Two funds that hold the same index and differ by a tenth of a percent will differ by about 4% of ending wealth over forty years; that is the sum the fund industry's price war was about.

The waterfall below the headline

The expense ratio is the first cut, not the only one.

Trading costs inside the fund — the spreads and price impact of rebalancing — are not in the expense ratio. A fund that turns over 2% of itself a year barely notices them; one that turns over 100% pays them on the whole portfolio, every year.

Your own spread and commission when you buy and sell the units, covered in the liquidity lesson.

Withholding tax on dividends the fund receives from foreign companies, covered in the domicile lesson.

Tracking difference — everything above, plus the manager's skill at matching the index, summed into one number the next lesson shows you how to measure.

Headline return, minus each of those, is what you keep. A fee comparison that stops at the expense ratio compares the visible tenth.

In the data

The expense ratio is the one layer of the waterfall a fund publishes. Here it is for the S&P 500 fund, beside the yield its holdings paid out:

The fee is under a tenth of a percent a year, and the distribution yield is roughly ten times the fee, so the fund keeps about a tenth of the dividends it collects as its charge. Watch the units when you copy a fee from any fund page: some state it as a fraction, where 0.00095 means 0.095%, and reading that as a percentage makes the fee a hundred times too large.

Try it now

1. Take the net expense ratio from the table and multiply it, as a fraction, by €10,000. That is one year in the fund, in euros, and it is under a tenner.
2. Now do the same with the natural-gas fund's block below. The two funds' fees differ by a factor of eleven, and neither number would look alarming on its own.

3. Compound each over thirty years at a 7% gross return, in a spreadsheet or by hand with the rule of 72, and write down the two ending values. The gap between them is the argument this lesson exists to make, in your own arithmetic.