The fund formula is annual operating expenses divided by average net assets. As an investor, estimate your yearly dollar cost by multiplying your average balance by the published expense ratio.
The two calculations
A fund calculates its expense ratio this way: annual operating expenses ÷ average net assets. If a fund has $2 million of operating expenses and $1 billion of average net assets, the ratio is 0.002, or 0.20%.
Most investors do not need to rebuild the fund’s accounting. Use the expense ratio in the prospectus. Turn the percent into a decimal, then multiply by your average amount invested. For 0.20%, use 0.002.
This gives an estimate, not a line item from your statement. Your balance moves each day, and the fund reflects expenses in its value over time.
Expense ratio examples
$50,000 × 0.002 equals about $100 a year for a 0.20% expense ratio. The same $50,000 × 0.01 equals about $500 for a 1.00% ratio.
The difference is about $400 in the first year. Over time, the cost can become larger because fee dollars no longer remain invested to earn a return.
Two easy mistakes
Do not multiply by 0.20. That would treat 0.20% as 20% and make the answer one hundred times too large. Divide the percentage by 100 first.
The expense ratio may not include a sales load, trading spread, adviser charge, or account fee. Add those separately when comparing the total cost.
Three checks before you compare
- Did I turn the percentage into the right decimal?
- What balance should I use for a fair estimate?
- Which costs are not in this ratio?
Quick answers
How much is a 0.50% expense ratio?
It is about $50 a year for each $10,000 invested, or about $500 for each $100,000, before changes in the balance.
Where do I find a fund’s expense ratio?
Look in the fee table near the front of the fund’s prospectus. Your provider may show it too, but the prospectus is the formal source.
Checked against primary sources
This explanation was checked against the sources below. Rules and limits can change, so check the source before making a decision.
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