Expense ratio

The yearly fee a mutual fund or ETF charges, shown as a percentage of the money invested and taken out of the fund’s returns.

What it means

The expense ratio covers a fund’s ongoing costs, such as management, administration and record-keeping. Investors never see a bill; the fee is deducted gradually from the fund’s assets, so returns are reported after it. Index funds and ETFs often charge a small fraction of a percent, while many actively managed funds charge more.

Because the fee is charged every year on the whole balance, small differences compound over decades. The expense ratio does not include every cost: sales loads, trading costs inside the fund and account or advisory fees can be extra.

Formula

Annual cost = Amount invested × Expense ratio

Amount invested = average balance in the fund
Expense ratio = annual fee as a decimal (0.50% = 0.005)

Example

For example, $20,000 in a fund with a 0.50% expense ratio costs about $100 a year. Over time the gap widens: as an illustration, $10,000 growing at 5.9% a year after fees for 30 years becomes about $55,831, while at 5.0% after fees it becomes about $43,219, a difference of roughly $12,600.

How it’s used

Comparing similar funds before investing
Reviewing the options in a workplace retirement plan
Estimating the long-term drag of fees on savings

Good to know

Funds that track the same index are close substitutes, so the expense ratio is often the main difference between them.

Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.