Glossary · Defined term
Expense ratio
The expense ratio is the annual fee a fund charges investors, expressed as a percentage of assets. Definition plus a worked example of the cost.
Last updated Oct 2, 2026
What it means
The expense ratio is the annual fee a fund charges its investors, expressed as a percentage of assets. It covers management, administration, and operating costs, and it is deducted automatically from the fund's returns rather than billed separately. A 0.10 percent expense ratio costs $10 per year on a $10,000 investment. Small differences compound: over decades, a fund charging 1 percent a year keeps far less of the market's return than one charging 0.05 percent. Index funds and ETFs tend to have the lowest expense ratios because they require little active management.
An example
For illustration, two funds each earn 8 percent before fees, but one charges 0.05 percent and the other 1 percent. After 30 years, the low-cost fund leaves the investor with noticeably more money, purely because less was siphoned off each year. Fees are one of the few reliable predictors of fund performance differences.