Glossary
Expense Ratio
An expense ratio is the annual fee a fund charges, expressed as a percentage of the amount invested and deducted automatically from the fund's returns.
A 0.50% expense ratio costs $50 a year per $10,000 invested. The fee never appears on a statement as a line item — it is skimmed from performance — which is why funds costing ten times more than alternatives can go unnoticed for decades. Broad index funds are now available below 0.10%.
Why it matters in practice
Cost is one of the few return factors known in advance, and research consistently finds low expenses among the best predictors of future relative performance. Compounded over a working lifetime, the difference between a 1.00% fund and a 0.05% fund on the same portfolio can amount to years of retirement spending. The figure appears in every fund's prospectus and fact sheet.
Related terms: Index Fund · Basis Point · Load Fund · Mutual Fund · Prospectus