Expense Ratio
An expense ratio is the annual fee a fund charges investors, expressed as a percentage of assets under management. It is deducted automatically from the fund's returns. Lower is almost always better.
A 1% expense ratio on a $100,000 portfolio costs $1,000/year — and that cost compounds against you over decades. A 0.03% expense ratio on a comparable index fund costs $30/year on the same balance.
Vanguard popularised low-cost index investing. Today, broad-market index funds are available with expense ratios of 0.03%–0.10%. Actively managed funds typically charge 0.5%–1.5% — and most fail to outperform their index benchmark after fees over 10+ years.
When evaluating two funds with similar holdings, the expense ratio difference is one of the most reliable predictors of relative performance.
Related terms
- Index Fund
- An index fund is a portfolio of stocks or bonds designed to replicate the performance of a market index, such as the S&P 500. Index funds have lower fees than actively managed funds because no stock-picking is required.
- Dollar-Cost Averaging (DCA)
- Dollar-cost averaging is an investment strategy where you invest a fixed dollar amount at regular intervals, regardless of price. It reduces the risk of investing a large sum at the wrong time.
- Rate of Return
- A rate of return (RoR) is the net gain or loss of an investment over a specified period, expressed as a percentage of the initial investment.