The expense ratio is a measure of the total operating expenses for a mutual fund or ETF. It’s expressed as a percentage of the fund’s assets and it’s calculated by dividing the annual operating expenses by the average net assets in the fund over a 12-month period. The expense ratio can be used to compare funds within an asset class or across different classes.
An expense ratio is an annual fee charged by an investment company or fund manager for managing a fund. Expense ratios can be expressed as a percentage of the fund’s total net assets, so they are usually expressed as a percentage of your investment in that fund.
You might also hear this referred to as an expense ratio (or simply “the ER”), but we’re going to stick with calling it just that: an expense ratio.
The expense ratio calculator can be used in a number of situations:
- Fund comparison. Use this calculator to compare funds and their expense ratios, as well as other factors like performance and risk.
- Benchmark tracking. Use it to track how closely a fund’s performance matches its benchmark index over time, or if it’s slightly ahead or behind the index (and by how much). The data is presented in easy-to-read charts and tables.
- Fund comparisons within an asset class/category. Use it as part of your due diligence process when selecting exchange-traded funds or mutual funds that are all invested in the same industry sector or type of investment product category (e.g., domestic equity funds). For example, you may want to compare different closed-end funds that have similar strategies but slightly different holdings, so they’re all invested primarily in healthcare companies but some invest more heavily into pharmaceuticals than others do; each will have its own unique expense ratio for investors to consider before investing their money with them!
We’re not sure who first came up with the idea of an expense ratio, but we do know that it was first used in the 1940s. The expense ratio is a measure used to determine the total cost of maintaining an investment portfolio. The total cost includes fees charged by a fund’s custodian and administration, as well as any 12b-1 marketing fees charged by the fund itself.
Historically, this number has been used to compare one mutual fund to another and determine which one offers better value. In recent years, however, there has been debate over whether or not comparing funds based on their expense ratios is still relevant or helpful (and perhaps even misleading). That said, many investors still prefer using this method because it allows them to quickly figure out which funds are cheaper without having to run through each one individually.
A good expense ratio, from the investor’s viewpoint, is around 0.5% to 0.75% for an actively managed portfolio.
An expense ratio greater than 1.5% is considered high.
An expense ratio is important because it lets an investor know how much they are paying in costs by investing in a specific fund and how much their returns will be reduced.