Fee drag

The compounding cost of fees over time, which is far larger than the fee's annual percentage suggests on its own.

Example

A 1% annual fee does not just cost 1% a year - compounded over 30 years it can consume a quarter or more of the total gains that fee-free growth would otherwise have produced.

Important

Fees are one of the very few things about future returns you can know for certain in advance, which is exactly why they deserve more attention than most people give them.

Related terms

• Expense ratio — The annual fee a fund charges, expressed as a percentage of the money you have in it.
• Compounding — Earning returns on your past returns, not only on your original money.
• Assets under management (AUM) — The total value of the investments a fund, advisor or firm manages on behalf of clients.

Lessons that explain it

• Add up the fees for all ten years before you compare two funds — Management fees are usually quoted as an annual percentage, but what matters is the total over the fund's life, and whether the fee is charged on committed or invested capital. (10 min)
• Access and diversification, bought with a second layer of fees — Funds of funds and investment platforms give individuals access to managers and diversification they could not reach directly, in exchange for fees charged on top of the underlying funds' own fees. (11 min)
• The cost you can read, the costs you cannot, and the tax bill you did not choose — Four layers of cost sit behind one printed number, and a fund's own trading can hand you a taxable event on a position showing no gain at all. (13 min)
• Leverage turns a 35% fall into an 87% loss, and the fees arrive regardless — The main risks of buyouts are leverage working in reverse, illiquidity and layered fees, and tax treatment depends on jurisdiction and structure. (12 min)
• The cost of fees — A 1% fee doesn't sound like much. Compounded over decades, it can quietly consume a quarter or more of everything you would otherwise have earned. (10 min)
• Fee drag: why a small percentage becomes a large number — A recurring fee is not a one-off cost. It is removed every year, and the money removed stops compounding - which is why the damage over a long hold is far larger than the fees themselves. (12 min)

All 578 terms in the Investing glossary