Expense Ratio
The annual fee charged by a mutual fund or ETF, expressed as a percentage of the fund's average assets under management. It covers operating costs including management fees, administrative expenses, and distribution charges.
The expense ratio is one of the most important factors to consider when selecting a fund. It represents the total annual cost of owning a fund, deducted directly from the fund's returns before they reach you as an investor. Even small differences in expense ratios can compound into significant amounts over long investment horizons.
What's Included
An expense ratio typically covers:
- Management fees paid to the fund's portfolio managers
- Administrative costs such as recordkeeping and customer service
- 12b-1 fees for marketing and distribution
- Other operating expenses like legal and accounting fees
Index funds and passively managed ETFs tend to have much lower expense ratios (often 0.03%–0.20%) compared to actively managed funds (0.50%–1.50% or more). Over a 30-year investment period, a 1% difference in fees can reduce your final portfolio value by over 25%. Learn more about fund structures in our guide to ETFs.