Pay index fund expense ratios with cash instead of fund balance

In many cases the expenses are not pulled out on a specific day, so this wouldn't work.

On the other hand some funds do charge an annual or quarterly fee if your investment in the fund is larger than the minimum but lower than a "small balance" value. Many funds will reduce or eliminate this fee if you signup for electronic forms or other electronic services. Some will also eliminate the fee if the total investment in all your funds is above a certain level.

For retirement funds what you suggest could be made more complex because of annual limits. Though if you were below the limits you could decide to add the extra funds to cover those expenses as the end of the year approached.

It seems at most a cosmetic difference - nothing keeps you from adding the 9$ cash to the fund the same day the fees are deducted from the shares.

Simply put, that's not allowed.

Outside a retirement fund, they simply do not provide a mechanism to pay that expense ratio separately. Ergo, any effort to pay that expense ratio would be classified as a new/additional purchase of the fund. You now must deal with

  • any fund rules about activity or minimum purchase size
  • creating a separate purchase with a separate cost basis, complicating tax paperwork.

Inside a retirement fund, paying the expense ratio of the fund with cash would be treated as an additional contribution, which may then violate contribution rules (such as going over your contribution limit, or contributing past age 70-1/2).