Expense Ratio
Definition
The annual fee charged by a fund (ETF or mutual fund) to cover operating expenses, expressed as a percentage of assets. A 0.10% expense ratio means you pay $10 annually per $10,000 invested.
The expense ratio is the most important fee to consider when choosing investment funds. It's an annual charge deducted directly from the fund's assets, which means it reduces your returns by that percentage every year. Unlike trading commissions that you pay once, the expense ratio compounds against you over your entire holding period.
The impact of expense ratios is enormous over long time horizons. On a $100,000 portfolio growing at 8% annually over 30 years, a 0.03% expense ratio costs about $8,000 total, while a 1.00% expense ratio costs about $260,000 — a difference of $252,000 from a seemingly small percentage difference.
Index ETFs have driven expense ratios to near-zero levels. Vanguard's VTI (Total Stock Market) charges 0.03%, Fidelity's FZROX charges 0.00%, and Schwab's SCHB charges 0.03%. Actively managed funds typically charge 0.50% to 1.50%, which they must overcome through superior performance just to match index returns.
The expense ratio includes management fees, administrative costs, marketing expenses (12b-1 fees for mutual funds), and other operational costs. It does not include trading commissions within the fund or the bid-ask spread on ETFs, which are additional hidden costs.
When comparing similar funds, the expense ratio should be a primary decision factor. For index funds tracking the same benchmark, the one with the lower expense ratio will almost always deliver better returns, since both funds hold essentially the same securities.
Where this appears in Clarity
Clarity automatically tracks and calculates these concepts across your connected accounts.
Related Terms
Frequently Asked Questions
Does a higher expense ratio mean better performance?
No — the opposite is typically true. Higher-fee funds must generate higher returns just to match lower-fee alternatives. Research consistently shows that lower-cost funds outperform higher-cost funds on average. Expense ratio is one of the best predictors of future fund performance.
How is the expense ratio charged?
The expense ratio is deducted daily from the fund's net asset value, not charged as a separate fee to your account. You won't see a line-item charge — it's reflected in slightly lower daily returns. A 0.10% annual expense ratio means about 0.000274% is deducted each day.