expense ratio
The annual fee that mutual funds or ETFs charge investors, expressed as a percentage of assets under management.
Example
“The index fund had an expense ratio of just 0.03%, making it extremely cheap to own.”
Memory Tip
The expense ratio is what the fund EXPENDS (spends) of your money each year as a ratio.
Why It Matters
Expense ratios directly impact your investment returns because they reduce the amount of money available to grow. Even small differences in expense ratios can compound into thousands of dollars in lost gains over decades, making them a critical factor when choosing between similar funds.
Common Misconception
Many investors believe that higher expense ratios mean better fund management and higher returns, but this is often false. In reality, funds with lower expense ratios frequently outperform expensive actively managed funds after accounting for fees.
In Practice
If you invest 10,000 dollars in a mutual fund with a 1.5 percent expense ratio versus an ETF with a 0.10 percent expense ratio, the difference compounds significantly over time. After 30 years with 7 percent annual returns, the higher fee fund would cost you roughly 15,000 to 20,000 dollars more in foregone growth.
Etymology
Expense (cost) + ratio (proportion) — the proportion of your investment that goes to costs.
Common Misspellings
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See Also
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