Expense Ratio

The annual fee charged by a mutual fund or ETF expressed as a percentage of assets under management — the primary ongoing cost of owning a fund.

The expense ratio covers the fund's operating costs: management fees, administrative expenses, legal and accounting costs, and marketing fees (12b-1 fees in the US). It is deducted from the fund's assets daily on a pro-rata basis — you never write a check for it, but it continuously reduces the net asset value of your shares. A fund with a 0.50% expense ratio costs $50 per year on a $10,000 investment.

Expense ratios vary enormously across fund types. Passive index ETFs have driven expenses to near zero: Fidelity, Vanguard, and Schwab offer broad US index funds at 0.03–0.05%. Actively managed mutual funds typically charge 0.50%–1.50%, and some specialty or hedge-fund-like products charge 1.00%–2.00% plus performance fees. Over decades, even a 1% difference in expense ratio compounds into dramatically different outcomes — a 0.05% fund versus a 1.05% fund on a $100,000 portfolio for 30 years at 8% gross return produces roughly $75,000 more at the lower cost.

The expense ratio is not the complete picture of fund costs. Trading spreads, brokerage commissions (now usually zero for ETFs), tax inefficiency, and market impact costs also matter. Index ETFs have become dominant in part because they minimize all of these costs simultaneously.

This definition is for informational and educational purposes only. Nothing on Finance Compass constitutes financial, investment, or trading advice. Always conduct your own research and consult a qualified professional before making financial decisions.