An expense ratio is the yearly cost of running a mutual fund or ETF, shown as a percent of the money in the fund.
What it means
You usually do not receive a bill. The cost is taken from the fund, which lowers the return you keep.
The number may look tiny. Turn it into dollars before comparing funds. Also check whether an adviser or account fee sits on top of it.
A simple example
Put $100,000 in a fund with a 0.10% expense ratio and the cost is about $100 a year. Put the same amount in a fund with a 1.00% expense ratio and the cost is about $1,000 a year. The higher-cost fund takes about $900 more each year.
You do not write a $900 check. The money quietly comes out of the fund and reduces the return you keep. Over many years, the difference can grow because the money paid in fees also loses the chance to earn returns. A higher fee may be worth paying for a real benefit, but the fund should have to earn that extra cost—not hide it.
What people often miss
Cost is only one part of a fund choice, but it is one part you can know before investing.
Two funds with similar goals can have very different costs. Read the fund's fee table instead of guessing from its name.
Three questions worth asking
- What is the expense ratio?
- What does that cost me in dollars?
- Is there a lower-cost fund that does the same job?
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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