The real cost of a 1% investment fee

One per cent does not sound expensive. If a store offered a 1% discount, few people would rearrange their afternoon to get it.

Investment fund fees are different. A fund may charge you when you buy or sell, but it will certainly have recurring costs. Management and operating expenses pay for running the fund, including the people who manage it. These costs are deducted from the fund and reduce your return.

The recurring costs of actively managed funds often look small because they are expressed as a percentage of your assets. A 1% fee can seem modest. But the assets already belong to you. The more revealing question is how much of the value added by the manager goes back to the fund in fees.

The goal of an active fund is to beat its benchmark. Since you can invest in that benchmark at low cost through an index fund, the value added by active management is the difference between the fund's return and the return of its benchmark.

Consider a simple example. You invest $1,000 in an actively managed fund that earns 8% before fees. Your gain is $80. The fund charges 1%, or $10, leaving you with $70.

Over the same period, the fund's benchmark earns 6%. That would produce a $60 gain. Before fees, the active fund added $20 above its benchmark.

The same $10 fee can now be viewed three ways. It is 1% of your $1,000 investment, which is the figure shown in the fund's documents. It is 12.5% of your $80 gain. And it is 50% of the $20 the manager added above the benchmark.

In other words, half the value the manager added went back to the active fund in fees. Imagine a store charging 1% of everything you owned for finding you a bargain, then keeping half the savings. The cashier would have some explaining to do.

Seen from that angle, recurring active-fund fees are much more expensive than they first appear. And remember, this is the lucky version of the story: you happened to choose a manager who beat the benchmark by one percentage point after fees.

In 2025, after management and other ongoing costs, an average of 85.4% of active funds across the categories tracked by the SPIVA Canada Scorecard underperformed their benchmarks. Underperformance rates increased over longer periods. Put plainly, the odds of picking a winning active fund are poor. You are more likely to pay the higher fee and still end up behind.

The guide on why active investing falls behind after fees explains the arithmetic behind those results.