You Won't Believe What a Half-Percent Will Cost You

As I recently pointed out in When to Dump Your Index Fund, you shouldn't pay any more than you absolutely have to for a fund that simply tracks an index. Today I'll demonstrate just how much money you stand to lose because of seemingly small differences in expense ratios. It might knock your socks off, so please have another pair handy. (And keep the figure $328,487 in mind.)

A Spartan victory
Let's look at two funds that track the S&P 500, Fidelity Spartan 500 Index Investor (FSMKX) and Dreyfus S&P 500 Index (PEOPX). As you see below, there's no difference in the funds' top holdings:

The big, bad, back-breaking difference, however, is that expense ratio line, and the 40 fewer basis points that Fidelity charges. To illustrate, let's say the market gets near its historical performance and averages 10% annually over the next few decades. Now we'll take two investors who contribute $4,000 each year to their index funds, one in the Spartan 500 and one in the Dreyfus S&P 500:

As the years roll by, the power of compounding exposes the real difference between the less than half a percentage point separating the two expense ratios. While the first three lines are telling enough, the last one represents an investor opening a fund at age 21, and the nest egg that will have accumulated by the time he retires at age 65.

Let your eyes linger on that last number for a few moments: $328,487. That's what a few measly tenths of a percentage point could cost you.

Convinced?
Whether you save $1,572 or $328,487, it's real money, and you deserve to keep it. Check your index fund's expense ratio today, and then shop around to see if you can do better.

Since Motley Fool Champion Funds began, Shannon Zimmerman has posted 21% cumulative returns, beating the market and relevant benchmarks by 11 percentage points. He keeps an eagle eye not only on expense ratios, but also performance and management effectiveness. Besides regular mutual fund recommendations each month, he steers you toward specific index funds in his model portfolios, and a guest pass will give you access to all that. Try it for free for 30 days, and if you don't like it, it won't cost you a penny.

Rex Moore would take Hector over Achilles in a Trojans vs. Spartans rematch. Of the companies mentioned in this article, he owns shares of Microsoft, Procter & Gamble, and Johnson & Johnson. Microsoft and Pfizer are Motley Fool Inside Value picks. Bank of America is a Motley Fool Income Investor pick. The Fool has adisclosure policy.