A year, before cost. Dividends belong here, at whatever rate they are reinvested.
Expense ratio or equivalent. A directly held share carries none.
Cost drag is what the same holding would be worth at zero cost less what it is worth, so it includes the growth the cost never earned and is always larger than the fees paid.
Hypothetical illustration of cost drag only, on two generic holdings. Both returns are constant and typed; a real return varies year to year and may be negative. No security is named and neither side is preferred.
The cost is netted once a year against the balance. A fund accrues its expense ratio daily against net asset value, which is very slightly larger for the same stated ratio. Does not account for taxes, trading costs, bid-ask spreads, tracking difference, or the concentration difference between a single holding and a diversified one.
An annual cost is charged on the whole balance every year, so it takes both the money itself and every year of growth that money would have earned afterwards. Over a long holding period a fraction of a percent a year compounds into a figure much larger than the fees paid, and this shows the size of it against two sets of inputs.
$10,000 growing at 8% a year for 20 years reaches $46,351 at a 0.03% annual cost and $40,546 at 0.75%. The gap is $5,805, more than half the original stake, from a difference of 0.72 percentage points a year, because every dollar of cost also stops earning.
Judging a cost ratio by the first year’s dollar amount. On $10,000 the difference above is $72 in year one, which is why the twenty-year figure is the one that matters.