What it is
The expense ratio is the annual cost of running a fund, shown as a percentage of the money invested. A fund with a 0.10% expense ratio costs about $10 a year per $10,000 invested. You never see a bill; the fee is taken out of the fund’s assets and reduces your return.
A worked example
Suppose a fund earns 7% a year before fees and you invest $10,000 for 30 years. With a very low fee of 0.05%, you net about 6.95% and end with about $75,100. With a 1.00% fee you net 6% and end with about $57,400. The difference, roughly $17,600, came purely from fees. The returns here are an illustration, not a prediction.
Other costs to know
- Sales loads: commissions on some mutual funds, charged when you buy or sell.
- Advisory fees: a separate percentage if someone manages your account.
- Trading costs: the gap between the buying and selling price, which matters more for thinly traded ETFs.
- Taxes: funds that trade a lot can create taxable gains.
How to compare
For funds that track the same index, the lower fee usually wins, since the holdings are almost identical. For actively managed funds, ask whether the extra cost has been earned over many years, not just one good stretch. The fund’s page on its provider’s website lists the expense ratio and its holdings.