Glossary
How expense ratios compound
Updated Reviewed quarterly
Expense ratio compounding refers to how small annual fund fees compound into large absolute amounts over multi-decade holding periods. A 0.5% fee gap between two index funds tracking the same benchmark can compound to tens of thousands of dollars on a six-figure portfolio held for 30+ years. The mechanism is straightforward: each year the fee is taken from the fund's growing balance, so the dollar cost grows alongside the portfolio.
The math, simplified. If two ETFs track the same index and one charges 0.5% more in annual TER, the higher-cost fund's investor effectively gives up 0.5% of every year's growth. Over a single year, that's small. Over 30 years compounding, the gap explodes.
Worked example. NZ$100,000 invested, 7% pre-fee annual return, 30 years.
- Fund A at 0.25% TER (e.g. Kernel NZ20): final value ≈ NZ$719,000
- Fund B at 0.75% TER (e.g. older Smartshares specialty fund): final value ≈ NZ$623,000
- Cost of the 0.5% gap over 30 years: roughly NZ$96,000 — paid to fund managers in fees
This is why low-cost index investing has displaced active management for so much of long-term equity allocation. The fee gap between active and passive is often 0.75-1.25% per year — compounding to a quarter or more of the portfolio's final value over decades.
For NZ investors specifically. The fee comparison must include not just the underlying fund TER, but also brokerage and FX margin where applicable. A US-listed ETF at 0.03% TER (VOO) looks unbeatable on headline cost — but add 0.5% FX margin every time you put NZD into it (plus any broker brokerage), and the all-in cost for small frequent contributions can exceed an equivalent NZ-PIE fund at 0.34% TER (USF). For lump-sum buy-and-hold above the FIF threshold, direct US-listed wins. For DCA-style small regular contributions, NZ-PIE often wins on all-in cost.
The hidden version. Active managed funds often charge a "performance fee" on top of their headline TER. KiwiSaver active funds often charge 0.80-1.50% all-in. Brokerage on small frequent trades acts like an implicit fee. All of these compound the same way as the TER — and they're easier to spot once you've seen the TER math.
Where you'll see this term
