Expense Ratio

The expense ratio is the yearly cost of owning a fund, stated as a percentage of the money invested in it. It equals the fund's total annual operating expenses divided by its average net assets. A fund with an expense ratio of 0.50% costs its shareholders $5 a year for every $1,000 invested. The charge is not billed separately: it is taken out of the fund's assets bit by bit, usually daily, so it shows up as a slightly lower net asset value (NAV) and a lower return.

Every mutual fund and exchange-traded fund (ETF) in the United States must show its expense ratio in the fee table of its prospectus, labelled "Total Annual Fund Operating Expenses". In the UK and EU the equivalent figure is the ongoing charges figure (OCF). The expense ratio is the single most comparable cost number across funds, but it is not the only cost: sales charges and trading costs sit outside it.

Think of the expense ratio as a small yearly membership fee that is skimmed off your savings automatically instead of being sent to you as a bill. You never write a cheque, so it is easy to forget, but it is taken every year whether the fund does well or badly.

A fee of half a percent sounds tiny. The trouble is that it is charged on the whole balance, year after year, and the money it removes can no longer grow. Over a few decades, the gap between a cheap fund and an expensive one can add up to a meaningful slice of a retirement pot.

The expense ratio is calculated as:

• $\text{Total annual fund operating expenses}$ is everything the fund paid during its fiscal year to run itself: the management fee, distribution and service fees, and other expenses.
• $\text{Average net assets}$ is the average value of the fund's assets minus liabilities over the same year.

Example: a fund averages $500 million in net assets and pays $2.5 million in operating expenses during the year. Its expense ratio is $2.5 \div 500 = 0.005$, or 0.50%. An investor with $10,000 in the fund pays about $10{,}000 \times 0.005 = 50$ dollars a year.

The long-run effect compounds. If a portfolio earns 6% a year before costs, $10,000 grows to about $32,071 in 20 years with no fees. With a 0.10% expense ratio (a net 5.9% a year) it reaches about $31,472. With a 1.00% expense ratio (a net 5%) it reaches only about $26,533, roughly $5,500 less.

Under the SEC's Form N-1A fee table, the expense ratio includes:

• Management fees paid to the investment adviser for running the portfolio.
• Distribution and service fees, including any 12b-1 fee.
• Other expenses such as custodian, administrator, audit, legal, transfer-agent and board costs.
• Acquired fund fees and expenses, a separate line when the fund invests in other funds.

It excludes one-off sales charges (front-end loads or a contingent deferred sales charge), account fees charged by a broker, and the fund's own trading costs such as brokerage commissions and bid-ask spreads. Those trading costs rise with the portfolio turnover ratio, so a fund with a low expense ratio but very high turnover can cost more than it appears. Prospectuses may show a "gross" expense ratio and a lower "net" one after a fee waiver; investors should check when any waiver can end.

According to the Investment Company Institute, the asset-weighted average expense ratio in 2025 was 0.40% for US equity mutual funds and 0.36% for bond mutual funds, while index equity ETFs averaged 0.14% and index bond ETFs 0.09%. These averages have fallen for decades as investors have moved to index funds and cheaper share classes.

Ratios tend to be higher for actively managed funds, specialist or international strategies, small funds that cannot spread fixed costs, and share classes carrying distribution fees. Large index funds often charge only a few hundredths of a percent.

Because it is reported in a standard way, the expense ratio is the easiest figure for comparing two funds with similar aims, and it appears on every fund fact sheet. Research by fund analysts such as Morningstar has found that lower-cost funds have, on average, been more likely to survive and outperform their higher-cost peers. Still, cost is one factor among several: investors also look at the fund's investment objective, risk, total return after fees and how closely it matches its benchmark.

• Investor.gov (SEC): Expense Ratio
• Investor.gov (SEC): Mutual Fund and ETF Fees and Expenses