Expense Ratio
The expense ratio is the annual fee a mutual fund or ETF charges, expressed as a percentage of the money you have invested in it.
Every fund has costs for management, administration, record keeping and marketing. The expense ratio rolls these ongoing costs into a single yearly percentage. You never receive a bill; instead, the fee is deducted from the fund's assets a little each day, which slightly lowers its returns.
Expense ratios vary widely. Broad index ETFs often charge only a few hundredths of a percent, while actively managed or specialized funds can charge 1% or more. The figure does not include trading commissions, sales loads or the fund's internal trading costs.
Small differences add up over decades because fees compound just like returns. Example: on a $10,000 investment, an expense ratio of 0.10% costs about $10 per year, while 1.00% costs about $100 per year. Over 30 years of growth, the gap in final account value can reach many thousands of dollars.
Comparing expense ratios is one of the simplest ways to evaluate similar funds, since cost is one of the few factors investors can control.