What a percentage a year adds up to
A management expense ratio is quoted as a small annual number, and it is charged on the whole balance every year, including on the growth that earlier years’ costs already reduced. Put your own figures in and see where two cost levels end up. It runs in your browser. Nothing you type is sent anywhere, and nothing is saved when you leave.
- Ending balance at 0.2%
- $843,167
- Ending balance at 1%
- $734,926
- You put in
- $350,000
$17,041 paid in costs over 25 years.
$77,920 paid in costs over 25 years.
At no cost at all this reaches $872,968.
Over 25 years, on these assumptions, the two cost levels end $108,241 apart. The 0.2% path ends above the 1% one. Cost is one input among several, and two funds charging different amounts are rarely holding the same thing.
| Year | At 0.2% | At 1% | At no cost |
|---|---|---|---|
| 5 | $133,604 | $129,860 | $134,556 |
| 10 | $244,371 | $231,493 | $247,712 |
| 15 | $391,126 | $360,835 | $399,140 |
| 20 | $585,561 | $525,442 | $601,784 |
| 25 | $843,167 | $734,926 | $872,968 |
How it calculates
Each year, the cost is taken from the balance at the start of that year, the rest grows at the return you entered, and the year’s contribution is added at the end. So the first year’s cost is exactly your starting balance multiplied by the percentage, a figure you can check by hand, and every year after that is charged on a balance the earlier costs have already made smaller. That compounding is the whole of the effect.
A real expense ratio accrues daily against a fund’s net asset value rather than once a year. Charging it annually keeps the arithmetic verifiable, and the result is an illustration of a cost level rather than a measurement of any particular fund.
What this deliberately does not do
- It names no funds. Both cost levels are yours to enter. Your fund’s current MER is on its fund facts document and its page on the issuer’s site; a figure republished here would be one more copy to go stale.
- It does not say which cost is better. Two funds charging different amounts are rarely holding the same thing. Cost is one input, it is the one that is knowable in advance, and that is the only reason it is worth isolating.
- It is not a projection of your portfolio. A constant annual return is a modelling convenience, not a forecast. Real returns arrive unevenly, and the order they arrive in changes the answer, which is the subject of the time-weighted vs money-weighted calculator.
- It ignores trading commissions, account fees, currency conversion and tax. Each is real and none of them is an expense ratio. Mixing them into one number would make it comparable to nothing.
Educational only, and accurate to what you enter. This is not advice and it is not a forecast. For how Luum measures what the funds you already hold cost you each year, across every account, see portfolio returns.