If a fund has a 0.50% expense ratio and you invest $5,000 for 30 years with a 7% annual return, qualitatively describe the impact of fees.

• A. Fees have no noticeable impact on long-term returns.
• B. Fees are the only factor determining final balance.
• C. Fees reduce cumulative returns over time, lowering final balance; small differences compound significantly.
• D. A higher expense ratio increases returns.

Answer: (C)

Fees matter because investment returns compound over time. A fund with a 0.50% expense ratio takes that amount out of your assets each year, which effectively reduces the growth rate of your investment. If the gross return is 7%, the net return after fees is a bit lower, around 6.5%. Over 30 years, that small difference compounds and leads to a noticeably lower final balance. In other words, even small ongoing fees can erode much of the gains you would otherwise earn, especially when you’re invested for decades. The idea that fees don’t matter or that higher fees boost returns isn’t correct; fees reduce, not increase, long-term growth.