Why pay for the cheap one?
The higher fee would be worth it if the manager reliably beat the market by more than the fee. S&P Dow Jones Indices checks every year. Over every horizons, most active U.S. stock funds fall short of their index after fees. Over 15 and 20 years, about nine in ten do.
Morningstar compares what funds returned with what the average dollar in them earned, after investors' buying and selling. The gap is smallest for U.S. stock index funds.
Each path starts with the same balance and gets the same deposit at the end of every month. The market return is an annual compound rate R, turned into a monthly rate. Each path's yearly fee f is charged a twelfth at a time:
The fee is a percentage of the balance, not of the gain, so it grows with the balance. That is why a fee that looks small in year one takes so much by the end: it is charged on every dollar you have saved, every year. The market return here is a steady average; real markets wobble from year to year, which changes the dollar amounts but not the lesson. Taxes, inflation, trading costs inside funds and sales loads are left out.
The defaults reflect the market and fund industry as published. You can change every one.
Method. scripts/build_data.py downloads Damodaran's workbook and computes the market
returns; the ICI, Vanguard, Kitces, SPIVA and Morningstar figures were read from the documents above and are
pinned in that script with their table and page. The growth curves are arithmetic on those figures and your inputs.
This page illustrates history and arithmetic. It is not investment advice.
It illustrates The case for index funds, a lesson in the personal finance guide.