ETF Expense Ratios: How Much Do Investment Fees Really Matter?

Many people focus on investment fees and try to reduce them as much as possible.

A common type of content you will come across is a comparison between two ETFs, where one has an expense ratio that is 0.1% lower than the other.

The argument is usually quite straightforward. Fees compound over time, and even a small difference can translate into a significant amount of money.

And that's true.

But I wonder if we sometimes take this obsession with optimisation a little too far.

How Much Does 0.1% Actually Cost?

Let's say an investor has a 30-year investment horizon, invests $1,000 every month, and earns 8% per annum before fees.

Over 30 years:

• A 0.1% annual expense ratio reduces terminal wealth by approximately $29,910.
• A 1.0% annual expense ratio reduces terminal wealth by approximately $270,388.

Assuming 2% annual inflation, those amounts are worth approximately $16,512 and $149,274 respectively in today's purchasing power.

Clearly, reducing a 1% expense ratio can make a significant difference.

But what happens when we are trying to reduce something that is already low?

Suppose we are choosing between two ETFs charging 0.10% and 0.07%.

Under the same assumptions, the difference in terminal wealth is approximately $8,901, or about $4,914 in today's purchasing power.

I'm not saying that $4,914 is insignificant.

But significance is relative.

The investor paying 0.10% would have accumulated approximately $1.46 million after 30 years. The additional $8,901 represents roughly 0.6% of that portfolio.

And that brings me to another consideration that I think we don't talk about enough.

Your Mental Energy Has Value Too

We all have limited mental bandwidth and decision-making energy.

You may have heard of people like Mark Zuckerberg, who is often seen wearing similar T-shirts, or Jensen Huang, who is known for his signature leather jacket.

Whatever their personal reasons, I think there's an interesting principle here.

Not every decision deserves the same amount of attention.

When we spend time comparing an ETF charging 0.10% against another charging 0.07%, what exactly are we trying to achieve?

And don't forget, what if the cheaper ETF is listed on another exchange? What if switching requires selling your existing investments, incurring transaction costs, currency conversion costs, or even moving to another platform?

All of these introduce administrative friction.

You have to research, compare, execute, and perhaps monitor another account.

Is the potential saving worth your time and mental energy?

Perhaps it is, especially if the portfolio is large enough.

But perhaps it isn't.

I'm not suggesting that we should willingly pay unnecessary fees. Rather, I think we should be cognizant of what we are trying to achieve and whether the effort is proportionate to the benefit.

Focus on the Major, Not the Minor

A mountaineer doesn't reach the summit simply by carrying the lightest backpack.

Sure, reducing unnecessary weight helps. But fitness, preparation, navigation, and knowing when to turn back are arguably much more important.

I think investing and personal finance are similar.

There are major decisions that can materially change our financial trajectory, and there are minor decisions that make relatively little difference.

For a Singaporean, some of the major decisions might include:

• Property: Choosing a home that is appropriate for your financial circumstances instead of stretching your finances to their limits.
• Car: Deciding whether you need a car in the first place, given the significant cost of car ownership in Singapore.
• Career: Investing in skills and opportunities that can meaningfully improve your earning power.
• Side hustles: Deciding whether the additional income is worth the time and energy taken away from other areas of your life.
• Children: Thinking about whether spending more on tuition is necessarily better than investing time in teaching and guiding your children.
• Lifestyle: Making spending decisions that are proportionate to your income, whether that's choosing your holidays, flights, or accommodation.
• Health: Staying healthy and avoiding habits that can become costly, both financially and physically.

These decisions can have a much greater impact on our financial well-being than shaving another few basis points off an already inexpensive investment.

Yet I sometimes wonder if people spend so much time optimising the minor decisions that they neglect the major ones.

Perhaps it's because the minor decisions are easier to quantify.

We can calculate the difference between a 0.10% and 0.07% expense ratio down to the dollar.

But how do you quantify the value of spending more time with your children? Or choosing a less stressful career? Or maintaining good health?

Just because something is easier to measure doesn't necessarily make it more important.

Good Enough Is Good Enough

I like to think that good enough is good enough for most things.

This doesn't mean settling for mediocrity or being careless with money.

It means recognising that there is a point where further optimisation produces diminishing returns.

If you've already built a diversified portfolio, are investing consistently, and are paying reasonably low fees, perhaps the next improvement to your financial life doesn't come from finding an ETF that's 0.03% cheaper.

Perhaps it comes from making better career decisions, spending more intentionally, or simply staying invested through difficult markets.

And perhaps the time you save from not constantly optimising your investments could be better spent elsewhere.

The goal of personal finance isn't to optimise every dollar. It's to make good enough financial decisions so that we can spend more of our lives on things that matter.