Expense Ratio
An expense ratio is the annual fee charged by a mutual fund or ETF to cover operating expenses, expressed as a percentage of assets under management. Lower expense ratios mean more of your money stays invested.
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Exam Tip
Lower expense ratio = more money working for you. Index funds typically have lowest expense ratios.
What is an Expense Ratio?
The expense ratio is the annual percentage of your investment that goes toward fund operating costs. It's deducted from fund assets, reducing your returns.
What's Included
| Cost Type | Examples |
|---|---|
| Management Fees | Portfolio manager compensation |
| Administrative | Record keeping, statements |
| 12b-1 Fees | Marketing and distribution |
| Other | Legal, accounting, custodial |
Typical Expense Ratios
| Fund Type | Typical Range |
|---|---|
| Index ETF | 0.03% - 0.20% |
| Index Mutual Fund | 0.10% - 0.50% |
| Actively Managed | 0.50% - 1.50% |
| Target Date | 0.30% - 0.75% |
Impact on Returns
| Initial Investment | Expense Ratio | Value After 30 Years (7% return) |
|---|---|---|
| $100,000 | 0.10% | $739,000 |
| $100,000 | 0.50% | $662,000 |
| $100,000 | 1.00% | $574,000 |
Why Expense Ratios Matter
- Lower fees = more money compounding
- Active funds rarely beat indexes after fees
- Small differences compound significantly over time
- Compare similar funds by expense ratio
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Related Terms
Mutual Fund
A mutual fund is a professionally managed investment vehicle that pools money from multiple investors to purchase a diversified portfolio of securities.
Exchange-Traded Fund (ETF)
An exchange-traded fund (ETF) is an investment fund that trades on stock exchanges like individual stocks, typically tracking an index while offering diversification, low costs, and tax efficiency.