ETF expense ratios vary typically between 0,1-0,8% and the lowest ratios are to be found among very popular passive index funds such as SPDR S&P 500 ETF Trust (NYSEARCA: SPY).
Compared to actively managed mutual funds ETFs have very low yearly fees. However, it's easy to fall into trap of thinking that expense ratios below 1% are small enough not to matter that much.
To illustrate why even expense ratios in the ballpark of 0,2-0,6% are significant over the very long term, I calculated two examples for investment of 10.000 euros over 40 years.
In the first scenario (above) I assumed that yearly gain is 5%. The difference between no yearly cost (expense ratio 0%) and 0,6% year cost is 14.422 EUR.
To get a more drama, I calculated a second scenario (below) where yearly gain is 10%. There the difference between no yearly cost (expense ratio 0%) and 0,6% year cost is staggering 88.935 EUR.
Naturally, the markets do not produce steady returns and there are ups and downs over the years. Thus, the calculations above are completely theoretical and made to illustrate the effect of yearly cost in simple scenarios.
Takeaway for buy and hold investors:
In the long run, it's not the profits alone that matter - also cost of holding matters a great deal!
The good news is that the investor can fully control his/her yearly fees by selecting ETFs smartly or investing directly into stocks.
