ETF fees can erase $6,100 from returns over 26 years

ETF expense ratios compound against investor returns, with a 0.14 percentage point fee gap on look-alike S&P 500 Value funds producing a $6,100 difference on $10,000 invested over nearly 26 years.

The late Vanguard founder John Bogle called it "the tyranny of compounding costs" — every dollar removed from a portfolio to pay expenses is a dollar that can no longer compound on the investor's behalf.

From October 2000 through August 2026, the iShares S&P 500 Value ETF (IVE), charging 0.18 percent, returned 7.5 percent annualized, turning $10,000 into approximately $65,650. The State Street SPDR Portfolio S&P 500 Value ETF (SPYV), charging 0.04 percent, returned 7.9 percent annualized, growing the same stake to roughly $71,831.

The gap illustrates why fees are among the few variables investors can control in advance. Morningstar research has repeatedly found that costs are among the more reliable predictors of future fund performance, with lower-cost funds generally having better odds of outperforming more expensive peers.

How expense ratios work behind the scenes

ETF providers must prominently disclose the costs investors pay to own their funds. The expense ratio calculates an ETF's annual operating expenses as a percentage of its assets. Investors do not pay this upfront; expenses accrue daily and are deducted from the ETF's net asset value behind the scenes.

A 0.10 percent expense ratio costs approximately $10 annually for every $10,000 invested. The expense ratio can incorporate several costs: the management fee compensating the provider, plus index licensing, administration, accounting, custody, legal services, marketing and distribution. Some ETFs using a fund-of-funds structure also pass through acquired fund fees and expenses from underlying holdings.

Expense ratios are not static. Competitive pressure has driven fees downward across much of the ETF industry, and providers occasionally introduce temporary fee waivers. A prominent example occurred around the January 2024 launch of U.S. spot bitcoin ETFs, when several issuers temporarily waived some or all of their management fees to compete for early inflows.

Passively managed index ETFs tend to be cheaper than active ETFs. A fund replicating a well-established benchmark such as the S&P 500 can operate more cheaply than one employing portfolio managers and analysts. ETFs targeting narrow sectors or employing derivatives, short selling or leverage can see expense ratios exceeding 0.75 percent.

Zero-fee ETFs now span equities and bonds

Using data from ETF Central's screener, several funds demonstrate how inexpensive ETF investing has become.

The BNY Mellon U.S. Large Cap Core Equity ETF (BKLC) charges a genuine 0.00 percent expense ratio — not a promotional waiver. It tracks the Solactive GBS United States 500 Index rather than licensing a household-name benchmark, providing exposure to roughly 500 of the largest U.S. companies with $5.8 billion in assets. Securities lending income helps offset operating costs. Its largest holdings and sector allocations broadly resemble conventional S&P 500 ETFs, though it lacks international exposure.

The BNY Mellon Core Bond ETF (BKAG) also charges 0.00 percent, tracking the Bloomberg U.S. Aggregate Bond Index with more than 4,000 securities spanning Treasuries, mortgage-backed securities and investment-grade corporate bonds. It offers a 4.8 percent 30-day SEC yield, though its five-year annualized total return is negative 0.4 percent because bond prices move inversely to interest rates.

The iShares Gold Trust Micro (IAUM) is the lowest-cost spot gold ETF at 0.09 percent, holding roughly 1.8 million ounces of physical bullion with $8.1 billion in assets. Gold produces no cash flow, so the fund's 30-day SEC yield is zero and returns depend entirely on price appreciation.

The Morgan Stanley Bitcoin Trust (MSBT) charges 0.14 percent, undercutting many competitors in the spot bitcoin ETF space. Like gold, bitcoin produces no income, and the fund's returns depend on cryptocurrency price appreciation. MSBT is too new to have a five-year performance record.

Fee differences that look inconsequential over a single year compound into meaningful gaps over decades. When two ETFs provide essentially the same exposure, paying more creates a hurdle the more expensive fund must overcome year after year. Expense ratios and yields cited here reflect data available as of the source publication date; investors should verify current figures against the latest fund disclosures.

This article is for informational purposes only and does not constitute investment advice.