What does expense ratio mean

These funds regularly charge less than 0. Yes, you can find funds that charge zero fees. Larger funds can often charge a lower expense ratio because they can spread out some costs, such as the management of the fund, across a wider base of assets. In contrast, a smaller fund may have to charge more to break even but may reduce its expense ratio to a competitive level as it grows.

Major brokers offer tons of mutual funds without a sales load and with very low expense ratios. How We Make Money. Editorial disclosure. James Royal. Written by. Bankrate senior reporter James F.

Royal, Ph. Edited By Brian Beers. Edited by. Brian Beers. Brian Beers is the senior wealth editor at Bankrate. He oversees editorial coverage of banking, investing, the economy and all things money. Reviewed by. Kenneth Chavis IV. Share this page. Bankrate Logo Why you can trust Bankrate. Bankrate Logo Editorial Integrity. Key Principles We value your trust. Bankrate Logo Insurance Disclosure. Definition: What is an expense ratio? How expense ratios work An expense ratio is the cost of owning a mutual fund or exchange-traded fund ETF.

Read more From James. Then, your lower returns are magnified by the smaller amount of money you have to compound over time. What if you choose a fund with a slightly lower expense ratio? With the same contributions and performance over time, a fund with an expense ratio of 0. A fund with a lower expense ratio might not be the best match for all investors, however. In addition to any tools your brokerage offers, several online tools make comparing funds and expense ratios easy:.

If you want more guidance about factors to consider when choosing investments, a financial advisor can help direct your investment choices. Those looking for a hands-off approach may consider a robo-advisor to keep costs low while maximizing potential returns. With two decades of business and finance journalism experience, Ben has covered breaking market news, written on equity markets for Investopedia, and edited personal finance content for Bankrate and LendingTree. Select Region.

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Annual advisory fee 0. Was this article helpful? Share your feedback. Send feedback to the editorial team. Rate this Article. Thank You for your feedback! Something went wrong. Please try again later. The main fee you should know before signing any paperwork? The expense ratio. Here is a closer look at the role of expense ratios and what you need to know when evaluating buying into a fund.

An expense ratio is a fee that covers the total cost of the annual operating expenses for investing in a mutual fund or an ETF. It is expressed as the percentage of your investment that goes back to the fund.

Expense ratio is an umbrella term that can include a number of different fees that help keep the fund working for you, including:. While the expense ratio is the main fee you should know, it's not the only one.

Expense ratios don't include transactional fees or costs related to sales, such as shareholder fees charged to buy or sell fund shares or to compensate brokers.

They are strictly operational expenses. Expense ratios for ETFs tend to be lower than those for mutual funds. One reason for this is that many ETFs basically mimic the holdings of major indexes, which means they don't need as much attention by an investment professional.

Many mutual funds also follow this approach, but others are more active in researching and investing assets. These funds use more time and resources and the expense ratio is usually higher as a result.

Expense ratios are calculated as a percentage of average net assets that are being managed. The amount would be deducted from your fund's assets. This may not seem like much to pay a financial professional to grow your investments. But when you're looking at maintaining a fund for decades, a few expense ratio points can translate into large differences in net assets. Consider this example. Though expense ratios are a necessary evil of investing in managed funds, the percent charged varies from fund to fund.

Investor demand has caused more competition among fund providers and has resulted in a year downward trend in average expense ratios in the US. You can research different funds offered by investment companies, such as Vanguard or Fidelity, and comparison-shop funds that offer the most benefit for the lowest rates. Another option is working with a financial planner or registered investment advisor who can help guide you toward products that make sense for your goals.

Some things to look out for include:. Finding the national average for expense ratios is a good place to start when evaluating whether or not you're being charged a good rate.

According to independent investment research firm Morningstar, the average asset-weighted expense ratio in the US was 0.