Expense ratios are expressed as an annual percentage. Because fees compound negatively over time, a 1.00% expense ratio can consume over 25% of an investor's cumulative wealth across a 35-year compounding cycle compared to a low-cost 0.05% fund.
Algorithmic Formula / Notation
Net Compound Drag = Portfolio Value × (1 - Fee)^Years; Every 1% in fees consumes ~26% of potential 30-year ending wealth.
Institutional Scenario Example
Investing $100,000 for 30 years at 8% gross return yields $1,006,265 at 0.03% fee, but only $761,225 at 1.00% fee—a $245,000 friction loss.