How ETF Fees Impact Long-Term Portfolio Performance

14 February 2026

Exchange-Traded Funds (ETFs) have become a popular investment choice for both beginners and seasoned investors. They offer diversification, liquidity, and cost efficiency. However, one crucial factor that often goes unnoticed is ETF fees—those seemingly small expenses that can quietly eat away at your long-term gains.

If you’ve ever wondered, "Do these tiny fees really matter?", the short answer is yes, absolutely! In this article, we’ll break down how ETF fees impact your portfolio over time and why choosing low-cost options could be the smartest move for your financial future.

Understanding ETF Fees

Before we dive into the long-term impact, let’s first understand the different types of fees associated with ETFs.

1. Expense Ratio

The expense ratio is the most common fee investors encounter. It represents the annual cost of managing the ETF, expressed as a percentage of your total investment.

For example, if an ETF has an expense ratio of 0.50%, it means you’ll pay $5 annually for every $1,000 invested. While that may seem like pocket change, it compounds over decades.

2. Bid-Ask Spread

Unlike mutual funds, ETFs trade like stocks, meaning there’s a difference between the buying (ask) and selling (bid) price—this is called the bid-ask spread.

A wider spread means you'll pay slightly more when buying and receive slightly less when selling. Over time, frequent trading can increase these costs.

3. Trading Commissions

Although many brokers now offer commission-free ETF trades, some platforms still charge a small fee per transaction. If you're an active trader, these commissions can add up.

4. Hidden Costs (Tracking Errors & Tax Efficiency)

Some ETFs don’t perfectly mimic the index they track, leading to tracking errors—small deviations that can impact returns.

Additionally, ETFs are typically tax-efficient, but capital gains distributions from rebalancing or structural inefficiencies can create an unexpected tax bite.

The Long-Term Impact of ETF Fees

Now that we know what ETF fees are, let’s talk about why they matter so much in the long run.

1. The Power of Compounding Works Against You

Ever heard of the phrase "death by a thousand cuts"? That’s exactly what high ETF fees do to your portfolio.

Compounding is powerful when returns are reinvested, but it works against you when fees slowly chip away at those gains.

Let’s compare two ETFs:

| ETF | Expense Ratio | 30-Year Growth (Assuming 7% Annual Return) |
|------|---------------|--------------------------------------------|
| Low-Cost ETF | 0.10% | $761,225 |
| High-Cost ETF | 0.75% | $579,350 |

If you invested $10,000 and let it grow for 30 years at 7% annually, the difference between a low-cost and high-cost ETF would be nearly $181,875.

That’s not because the low-cost ETF performed better—it’s simply because less money was eaten away by fees!

2. Small Differences Add Up Over Decades

Think about it: would you rather invest in an ETF with a 0.10% expense ratio or a 1% expense ratio?

That 0.90% difference might not seem like much today, but over decades, it could cost you hundreds of thousands of dollars.

Even a seemingly tiny increase in fees can take a huge bite out of your long-term gains.

3. Lower Fees = Higher Net Returns

Your goal is to maximize net returns—the amount you actually take home after fees.

Historically, low-cost ETFs have outperformed high-fee ETFs over extended periods, not because they invest in better stocks, but because they take less from your investment.

It’s like running a marathon with a heavy backpack—why carry unnecessary weight when you don’t have to?

How to Minimize ETF Fees and Maximize Returns

Now that we understand the impact of ETF fees, let’s talk about how you can keep more of your money and pay less in fees.

1. Choose Low-Cost ETFs

Look for ETFs with expense ratios below 0.20% whenever possible. Vanguard, Schwab, and iShares are known for offering some of the lowest-cost ETFs in the market.

2. Pay Attention to the Bid-Ask Spread

If an ETF has a wide bid-ask spread, you may want to reconsider before buying. Stick with ETFs that have a high trading volume to keep costs low.

3. Avoid Frequent Trading

Since ETFs trade like stocks, frequent buying and selling can rack up costs. Consider a buy-and-hold strategy to minimize trading fees.

4. Check for Commission-Free ETFs

Most brokers now offer commission-free trades on ETFs. Make sure your brokerage account has this feature to avoid unnecessary costs.

5. Be Mindful of Tax Efficiency

If you're investing in a taxable account, consider tax-efficient ETFs or ones that focus on minimizing capital gains distributions.

The Bottom Line

ETF fees might seem insignificant at first glance, but over 10, 20, or 30 years, they can seriously erode your wealth. The lower the fees, the more you keep, and the bigger your portfolio grows.

Before you invest, always check the expense ratio, bid-ask spread, and trading costs. A little research today can save you thousands (or even hundreds of thousands) of dollars in the long run.

So, next time you're picking an ETF, ask yourself: "Am I choosing the most cost-effective option?" Because when it comes to investing, every penny counts!