When an ASX investor buys an exchange-traded fund (ETF), there are a few data points that make for essential viewing.
For starters, it's vital to understand exactly what an ASX ETF is investing in. Most funds hold an underlying basket of stocks that are held on behalf of investors. But others hold property, bonds, futures contracts, or even raw precious metal bullion.
That should be any potential ETF investor's first port of call.
Aside from that, investors might look to past performance. Past performance is never a guarantee of future returns, of course. Saying that, if you can tell what a fund has returned in the past, it can be a good indication of what to expect in the future.
But the third thing investors typically look at when it comes to ASX ETFs is the fees.
This metric is vital if one is to assess future returns. After all, investing returns are variable. But as night follows day, you will be paying that fee, regardless of what the ETF actually delivers.
Fees on ASX ETFs vary considerably. Charges for a simple index fund can be as low as 0.04% per annum, while the cost of a more complex ETF that uses derivatives and other financial instruments can be as high as 1.2% per annum.
A 1.2% fee might not sound too burdensome. But today, we'll discuss exactly how much even a few points' difference in ASX ETF fees can make on your wealth over time.
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ASX ETFs: Why fees matter
Below is a table showing three hypothetical S&P/ASX 200 Index (ASX: XJO) funds. All three track the same underlying ASX 200 Index. But we'll assume one charges a 0.05% management fee, one 0.1%, and the other a flat 1%.
Over the ten years to 30 June 2025, the ASX 200 Index returned an average of 8.83% per annum. We shall extend that return to a 20-year period for simplicity's sake to see just how large an impact fees can have on the compounding process.
We'll work out the performance of each ETF by subtracting its management fee from that overall return. We'll also assume an investor had invested $100,000 into each ETF back in July of 2005:
| ASX ETF | 10-year Performance inc. Fees (% p.a.) | Value of $100,000 after 20 years |
| ASX 200 Index | 8.83% per annum | $580,973 |
| ASX ETF 1 (0.05% fee) | 8.78% per annum | $575,234 |
| ASX ETF 2 (0.1% fee) | 8.73% per annum | $569,552 |
| ASX ETF 3 (1.00% fee) | 7.83% per annum | $476,317 |
As you can see, even the smallest of fees add up. Even opting for an ASX ETF that is 0.05% cheaper can save you almost $6,000 over a 20-year period. And opting for a 1% ETF rather than a 0.05% fund will cost an investor almost $100,000, or more than a fifth of their overall position.
Fees undermine the compounding process. As such, they should be one of your first considerations when choosing an ASX ETF or index fund.
