How can one relatively easily show that low expense ratio funds outperform high expense ratio funds?
"I hope a wall of text with citations qualifies as ""relatively easy."" Many of these studies are worth quoting at length. Long story short, a great deal of research has found that actively-managed funds underperform market indexes and passively-managed funds because of their high turnover and higher fees, among other factors.  Longer answer: Chris is right in stating that survivorship bias presents a problem for such research; however, there are several academic papers that address the survivorship problem, as well as the wider subject of active vs. passive performance. I'll try to provide a brief summary of some of the relevant literature.  The seminal paper that started the debate is Michael Jensen's 1968 paper titled ""The Performance of Mutual Funds in the Period 1945-1964"". This is the paper where Jensen's alpha, the ubiquitous measure of the performance of mutual fund managers, was first defined. Using a dataset of 115 mutual fund managers, Jensen finds that The evidence on mutual fund performance indicates not only that these 115 mutual funds were on average not able to predict security prices well enough to outperform a buy-the-market-and-hold policy, but also that there is very little evidence that any individual fund was able to do significantly better than that which we expected from mere random chance. Although this paper doesn't address problems of survivorship, it's notable because, among other points, it found that managers who actively picked stocks performed worse even when fund expenses were ignored. Since actively-managed funds tend to have higher expenses than passive funds, the actual picture looks even worse for actively managed funds. A more recent paper on the subject, which draws similar conclusions, is Martin Gruber's 1996 paper ""Another puzzle: The growth in actively managed mutual funds"". Gruber calls it ""a puzzle"" that investors still invest in actively-managed funds, given that their performance on average has been inferior to that of index funds. He addresses survivorship bias by tracking funds across the entire sample, including through mergers. Since most mutual funds that disappear are merged into existing funds, he assumes that investors in a fund that disappear choose to continue investing their money in the fund that resulted from the merger. Using this assumption and standard measures of mutual fund performance, Gruber finds that mutual funds underperform an appropriately weighted average of the indices by about 65 basis points per year. Expense ratios for my sample averaged 113 basis points a year. These numbers suggest that active management adds value, but that mutual funds charge the investor more than the value added. Another nice paper is Mark Carhart's 1997 paper ""On persistence in mutual fund performance"" uses a sample free of survivorship bias because it includes ""all known equity funds over this period."" It's worth quoting parts of this paper in full: I demonstrate that expenses have at least a one-for-one negative impact on fund performance, and that turnover also negatively impacts performance. ... Trading reduces performance by approximately 0.95% of the trade's market value.  In reference to expense ratios and other fees, Carhart finds that The investment costs of expense ratios, transaction costs, and load fees all have a direct, negative impact on performance. The study also finds that funds with abnormally high returns last year usually have higher-than-expected returns next year, but not in the following years, because of momentum effects. Lest you think the news is all bad, Russ Wermer's 2000 study ""Mutual fund performance: An empirical decomposition into stock‐picking talent, style, transactions costs, and expenses"" provides an interesting result. He finds that many actively-managed mutual funds hold stocks that outperform the market, even though the net return of the funds themselves underperforms passive funds and the market itself.  On a net-return level, the funds underperform broad market indexes by one percent a year. Of the 2.3% difference between the returns on stock holdings and the net returns of the funds, 0.7% per year is due to the lower average returns of the nonstock holdings of the funds during the period (relative to stocks). The remaining 1.6% per year is split almost evenly between the expense ratios and the transaction costs of the funds. The final paper I'll cite is a 2008 paper by Fama and French (of the Fama-French model covered in business schools) titled, appropriately, ""Mutual Fund Performance"". The paper is pretty technical, and somewhat above my level at this time of night, but the authors state one of their conclusions bluntly quite early on: After costs (that is, in terms of net returns to investors) active investment is a negative sum game.  Emphasis mine. In short, expense ratios, transaction costs, and other fees quickly diminish the returns to active investment. They find that The [value-weight] portfolio of mutual funds that invest primarily in U.S. equities is close to the market portfolio, and estimated before fees and expenses, its alpha is close to zero. Since the [value-weight] portfolio of funds produces an α close to zero in gross returns, the alpha estimated on the net returns to investors is negative by about the amount of fees and expenses. This implies that the higher the fees, the farther alpha decreases below zero. Since actively-managed mutual funds tend to have higher expense ratios than passively-managed index funds, it's safe to say that their net return to the investor is worse than a market index itself. I don't know of any free datasets that would allow you to research this, but one highly-regarded commercial dataset is the CRSP Survivor-Bias-Free US Mutual Fund Database from the Center for Research in Security Prices at the University of Chicago. In financial research, CRSP is one of the ""gold standards"" for historical market data, so if you can access that data (perhaps for a firm or academic institution, if you're affiliated with one that has access), it's one way you could run some numbers yourself."
The fund should be reporting returns net of expenses, so your interpretation is right; it made something like 0.42% (which sounds plausible, based on current yields on short-term securities), and the 0.05% is what's left after expenses. I've never seen a regular mutual fund report raw returns before expenses.  If one does, the my personal opinion would be that they're trying to snooker you, as that number isn't actually representative of anybody's actual returns.   If you look carefully, you should be able to find a table that reports several kinds of adjusted returns for the fund: As to what happens if a fund can't earn enough returns to cover its expenses, in that case the value of the fund shares will decrease.  This happens from time to time with riskier funds.  It shouldn't happen with a money market fund because both the returns and the expenses are fairly predictable, so the fund managers should be able to avoid it, unless they get caught up in a major crisis like the 2008 banking crisis.  In ordinary times, a money market fund managers who couldn't keep expenses below income would find themselves looking for a new job fairly quickly. Finally, for what it's worth, 0.37% is a really high expense ratio for a money market fund.  If you were to shop around, you could easily find comparable funds with expenses less than half that. "None of what I say is advice directed to you. It is how I would continue to analyse the situation you have, were it mine. First off, I prefer to work in certainties more than possibilities.  Saying that, paying down the mortgage makes sense as I can calculate the amount I will save. I also believe that rate rises are coming in the future, based on the talk from the BofE, so any money I pay off now means guaranteed less interest to pay in the future. Also, the lower my loan-to-value ratio, the better/lower interest rates I can receive in the mortgage market. If I do not want to work until retirement age, it'd be nice to have as few bills as possible in the decade or so prior to retirement age. I could then do early-retirement or part-time work in the run-up to retirement. I could use my savings to fund life until retirement pays out. I'd be aiming to put 15% of my gross income into ""future investing"" - using ISAs to build up a savings pot, taking advantage of retirement products. That way all the money is not tied to a normal retirement age before it can accessed. And it's not touchable by future greedy Government taxation... Any income leftover above the 15%, I'd be throwing at the mortgage - taking advantage of the 10% overpay window, remortgaging as LTV comes down. In theory, overpaid mortgage equity is money that could still be accessed (provided house prices don't decline and remortgaging is a possibility). So, in short, I'd follow a plan along these lines of logic. 1) Make sure I have 4-6 months of living expenses as a Rainy Day Fund. Insulate myself from fluctuations in my financial situation. 2) Put away 15% of annual gross income towards ""future saving"". ISAs first, pension second. 3) Overpay the mortgage and look to remortgage as LTV drops. When LTV nears 60%, look to lock in to a longer-term fix. eg. 2 year fixes at 90% LTV, 5 year fixes at 60%. 4) Reassess steps 2 & 3 as life happens, circumstances change, work fluctuates, etc. 5) Once the mortgage is paid off, build as much wealth as possible - ISAs first, then non-tax efficient savings products. Aim for keeping expenses down and raising my savings % rate as much as possible. [Your analysis was thorough and shows you are thinking through consequences. Never forget to factor in the risk of carrying debt. Having no/low debt as you get older means there's more income left to build wealth. Ignore the American view of carrying debt for life and trusting investments to outperform the debt. You have to pay monthly to keep that debt around - and it ain't a pet!]" That expense ratio on the bank fund is criminally high. Use the Vanguard one, they have really low expenses. You weren't really clear about where you are in the world, what currency you are using and what you want your eventual asset allocation to be. If you're in the US, I'd recommend splitting your international investment between a Global ex-US fund like VEU (as Chris suggested in his comment) and an emerging markets ETF like VWO.  If you're not in the US, you need to think about how much you would like to invest in US equities and what approach you would like to take to do so. Also, with international funds, particularly emerging markets, low expense ratios aren't necessarily the best value. Active management may help you to avoid some of the risks associated with investing in foreign companies, particularly in emerging markets. If you still want low expenses at all cost, understand the underlying index that the ETF is pegged to. GENIX was started by Joel Greenblatt back in 2013, so it is a real life test of the strategy. GENIX got off to a great start in 2013 and 2014 (probably because investors were pumping money into the fund) but had a terrible 2015, and lagging in 2016. Since inception it has under-performed an S&P 500 index fund by about 1.90% per year. The expense ratio of the fund is 2.15%, so before expenses GENIX still has a slight edge, but Greenbatt is doing much better the fund's investors. I think GENIX could be an OK investment if the expense ratio were reduced from 2.15% to around 0.50%, but I doubt the fund will ever do that. "If you want the answer from the horse's mouth, go to the website of the ETF or mutual find, and the expense ratio will be listed there, both on the ""Important Information"" part of the front page, as well as in the .pdf file that you click on to download the Prospectus.  Oh wait, you don't want to go the fund's website at all, just to a query site where you type in something like VFINX. hit SEARCH, and out pops the expense ratio for the Vanguard S&P 500 Index Fund? Well, have you considered MorningStar?" You are comparing a risk-free cost with a risky return. If you can tolerate that level of risk (the ups and downs of the investment) for the chance that you'll come out ahead in the long-run, then sure, you could do that.   So the parameters to your equation would be: If you assume that the risky returns are normally distributed, then you can use normal probability tables to determine what risk level you can tolerate. To put some real numbers to it, take the average S&P 500 return of 10% and standard deviation of 18%.  Using standard normal functions, we can calculate the probability that you earn more than various interest rates: so even with a low 3% interest rate, there's roughly a 1 in 3 chance that you'll actually be worse off (the gains on your investments will be less than the interest you pay).  In any case there's a 3 in 10 chance that your investments will lose money. Most mutual funds underperform the stock market.  Of those that over-perform, much of the performance can be attributed to dumb luck.  Most mutual funds exist to generate fees from you, rather than make you wealthy.  In my opinion, if you want to invest in one, choose a no-load index fund, and you will outperform most other funds.  Better still get some good financial education and learn to manage your funds/investments yourself.