Expense ratio
The annual percentage a fund charges to run you - the quiet drag on every dollar you invest.
The annual percentage a fund charges to run you - the quiet drag on every dollar you invest.
An expense ratio is the fund's operating cost divided by its assets, taken daily out of the net asset value - you never see a bill, you simply earn fractionally less. On $100,000, a 0.03% index fund costs $30 a year while a 1.00% active fund costs $1,000; over decades the difference compounds into a materially smaller account because every dollar paid in fees is a dollar that never earned a return of its own.
Ratios cluster by vehicle: broad index ETFs run 0.03-0.10%, sector and factor funds a little higher, active strategies 0.50-1.00%, and target-date or complex share classes can reach higher still - often with 12b-1 fees bundled in. Fees are the one certain component of return, so compare like-for-like exposure at the same ratio rather than chasing the lowest number in a different asset class, and check whether a lower-cost institutional share class is available to you.
Worked example
$50,000 invested for 30 years at 7% gross grows to roughly $380,000; the same at 6% after a 1.00% expense ratio lands near $287,000 - about $93,000 of silent leakage for a line item nobody shops for.
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