Expense Ratios: What a Few Basis Points Actually Cost You
August 19, 2026 · 2 min read · by ETFWinner Research
Fee differences look trivial written down and enormous compounded. Here is how to work out whether a cheaper fund is genuinely worth switching to.
Expense ratios are the only part of your future return you get to decide today. Everything else — market direction, timing, luck — is outside your control. That is why fees get so much attention, and also why the attention often goes to the wrong place.
How the fee is actually taken
You will never see an expense ratio charged to your account. It is deducted from the fund's assets daily, in slivers, and shows up only as a slightly lower price than the index it tracks. This invisibility is exactly why fees get ignored: nothing ever arrives to remind you.
A fund charging 0.03% and one charging 0.09% on the same index will diverge slowly and permanently, and the gap compounds because the money removed also stops earning.
When switching is worth it — and when it is not
- Worth it: in a tax-sheltered account, where you can sell and rebuy without a tax bill. Here, moving to a cheaper identical fund is close to free money.
- Usually not worth it: in a taxable account holding a large unrealised gain. Realising that gain to save a few basis points can cost more in tax than the fee saves in a decade.
- Never worth it: chasing a fee difference between funds that track genuinely different indices. You are no longer comparing costs, you are changing your exposure.
The fees that hurt more than the expense ratio
For most investors, three costs dwarf the headline fee: the bid-ask spread you pay every time you trade, the platform or brokerage commission, and — for foreign funds — dividend withholding tax. A thinly traded fund with a low expense ratio can cost more to own than a liquid fund with a higher one.
Bond funds are where this matters most, because the return is smaller to begin with. On a fund like BND at 0.03%, the fee is a modest share of the yield; on a bond fund charging ten times that, the fee eats a visible slice of the entire return.
A practical rule
Compare fees only within a category, never across categories. Choose the cheapest fund that tracks the index you actually want, confirm it trades with a tight spread at the times you buy, and then stop optimising. Beyond that point, the next basis point costs you more attention than it returns.
ETFs mentioned in this guide
Vanguard S&P 500 ETF
SPDR S&P 500 ETF Trust
iShares Core S&P/TSX Capped Composite Index ETF
Vanguard Total Bond Market ETF
Frequently asked questions
What is a good expense ratio for an index ETF?
For a large developed-market index fund, anything at or below roughly 0.10% is competitive, and the largest US funds go far lower. Sector, thematic and emerging-market funds legitimately cost more.
Do I pay the expense ratio separately?
No. It is deducted from fund assets daily and reflected in the fund price, which is why it is so easy to ignore.
Is a 0.75% ETF ever worth it?
Sometimes — for genuinely hard-to-access exposure such as frontier markets or narrow themes where no cheap alternative exists. It is not worth it for a mainstream index that a cheap fund already covers.
What costs more than the expense ratio?
Trading spreads, platform commissions and dividend withholding tax on foreign funds routinely cost more than the headline fee, especially for small or frequent purchases.