An expense ratio is the annual operating cost of a fund expressed as a percentage of assets. Investors do not usually receive a bill. The cost is reflected in the fund's return.
Translate the percentage into dollars
A 0.50 percent expense ratio costs about $50 per year for each $10,000 invested, before considering changes in account value. A 0.05 percent ratio costs about $5 on the same amount.
The gap grows as the balance grows.
Price is not the only difference
Funds can track different indexes, hold different assets, and use different strategies. The cheapest option is not automatically the right exposure.
Compare the objective, holdings, risks, and fees together.
Compounding works on costs too
Money used for fees cannot stay invested and earn future returns. Over a long horizon, that opportunity cost can exceed the visible annual charge.
Fees are one of the few investment inputs an investor can know in advance.
Sources
- U.S. Securities and Exchange Commission, Mutual Fund and ETF Fees and Expenses.
- FINRA Fund Analyzer.