fee drag

Also called: cost of fees, fund fee

How a yearly fee on the balance compounds against the return: net rate = (1 + r)(1 − f) − 1. 5% with a 2% fee leaves 2.9% a year; over 20 years the fee takes about half of the growth.

A fee charged as a share of the balance every year works like a negative return, and it compounds:

$r_{net} = (1 + r)(1 - f) - 1$

A fund earning 5% with a 2% yearly fee leaves 1.05 × 0.98 − 1 = 2.9% a year. The shortcut 5 − 2 = 3% is close for one year, but over many years only the product compounds correctly.

Over 20 years, 100,000 at 5% becomes 265,330; at 2.9% it becomes 177,136. The fee takes 88,194, about 53% of the growth, not "2%". The longer the horizon, the larger the share.

A one-off entry fee costs its percentage once (3% leaves 0.97), while a yearly fee keeps taking it (1% a year leaves 0.99²⁰ = 0.818 after 20 years). For long horizons, the yearly fee matters most.

Example

100,000 UAH for 20 years at 5% a year:

No fee: 100,000 × 1.05²⁰ = 265,330.
2% yearly fee: 100,000 × (1.05 × 0.98)²⁰ = 177,136.
Share of growth lost: 88,194 ÷ 165,330 = 53%.

Common mistakes

Calling it "only 2%". It is 2% of the whole balance every year.
Multiplying by years. 20 × 2% = 40% is wrong; the fee compounds.
Measuring against the final sum. The share lost is of the growth.
Ignoring fees in comparisons. Compare net returns, after fees and tax.

Learn it in the course

Taxes and fees · The after-tax rate r(1 − t), the tax-equivalent rate r ÷ (1 − t), a flat tax plus a fixed contribution and its effective rate, and how a yearly fee compounds against you.