Funds
Expense Ratio
The expense ratio is the annual fee a fund charges, taken from assets, expressed as a percentage.
You do not get an invoice for an expense ratio. It is deducted inside the fund, and it reduces your return every year. A 0.03% index ETF and a 1.00% active fund can own similar stocks and deliver very different results over twenty years, because the fee compounds against you. On a $10,000 holding, 1% is $100 a year before the effect on growth. Over decades it is a large slice of the outcome.
Cheaper is not automatically better if the funds do different things. Compare expense ratios inside the same exposure. A sector ETF at 0.10% is not expensive. A S&P 500 ETF at 0.50% is, because you can own the same index for a few basis points. Read the ratio in the fund profile before you buy the ticker that happened to show up first.
Formula
Expense ratio = annual fund operating costs ÷ average assets
Live example
Apple Inc. (AAPL) last printed at $345.33 with a market cap of $5.04T. If this symbol is a fund, the price is the tradable quote. Compare it with the holdings' value and the expense ratio before treating a one-day move as the return.
Related
ETF (Exchange-Traded Fund) · Index Fund · Sharpe Ratio
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Questions
Does the expense ratio include trading costs?
The headline ratio covers management and administration. Bid-ask spreads, commissions, and securities-lending effects sit outside it.
Are expense ratios falling?
On plain index ETFs, yes, and the competition is public. Specialty and active ETFs still charge more because the product is not a commodity.