Be careful with ETFs that have high expense ratios

Do you know why is it important?

ETFs

Wednesday, May 20, 2026

Mauricio Junior SHARE

Exchange-traded funds (ETFs) are one of the easiest ways to invest in the stock market. They offer diversification, simplicity, and low costs compared to many traditional investment products. But there is one detail many beginner investors ignore: the expense ratio.

At first, an expense ratio may look small and harmless. However, over time, it can quietly reduce a large portion of your investment returns.

What is an expense ratio?

The expense ratio is the annual fee charged by the ETF provider to manage the fund. This fee is automatically deducted from the fund’s assets, meaning you never receive a bill directly — but you still pay for it.

For example:

An ETF with a 0.03% expense ratio charges $3 per year for every $10,000 invested.
An ETF with a 1.00% expense ratio charges $100 per year for every $10,000 invested.

That difference may not seem huge in one year, but over decades, it becomes significant.

Why expense ratios matter so much

Investing is all about compound growth. The money you save on fees stays invested and continues growing over time.

Imagine two investors:

Investor A chooses a low-cost ETF with a 0.03% expense ratio.
Investor B chooses a similar ETF with a 1.00% expense ratio.

Both invest the same amount monthly for 30 years with the same market returns.

Even though the investments perform similarly, Investor A could end up with tens or even hundreds of thousands of dollars more simply because they paid lower fees.

The higher the expense ratio, the harder your investment must work just to overcome those costs.

Not all expensive ETFs are better

Many investors assume higher fees mean better performance. In reality, that is often not true.

Some actively managed ETFs charge high expense ratios while failing to outperform simple index ETFs like:

Vanguard S&P 500 ETF
Vanguard Total Stock Market ETF
Schwab U.S. Dividend Equity ETF

Low-cost index ETFs have historically outperformed many expensive actively managed funds over long periods.

When a higher expense ratio might be acceptable

There are situations where a higher expense ratio may make sense:

Specialized sector ETFs
International or emerging market ETFs
Certain bond or commodity ETFs
Actively managed strategies with strong long-term records

However, investors should always compare the fee with the value being delivered.

Paying 0.60% or 1.00% annually for an ETF that performs similarly to a low-cost index fund may not be worth it.

How to check an ETF’s expense ratio

Before buying any ETF, always look at:

Expense ratio
Historical performance
Holdings inside the ETF
Dividend yield
Fund size and liquidity

Most major brokerages and ETF providers clearly display this information.

As a general rule:

Below 0.10% = Very low cost
Between 0.10% and 0.40% = Reasonable
Above 0.50% = Requires closer attention
Above 1.00% = Usually expensive

ETFs are powerful investment tools, but not all ETFs are created equal. A high expense ratio may slowly drain your returns year after year without you noticing.