Expense Ratio

The expense ratio is the annual cost a fund or ETF deducts from its assets to cover management. You never get a bill for it. It comes out of the fund a little each day, and the price you see is already net of the fee, which makes it easy to forget you are paying at all.

The numbers make it concrete. Put $10,000 into a fund returning 7% a year for 20 years: at a 0.1% expense ratio you end with about $38,000, at 1.0% about $32,100. A 0.9 percentage point difference each year becomes nearly a $6,000 gap.

That is why the expense ratio is the one solid basis for comparing funds that track the same index. Nobody knows what returns will be, but the fee is a known number today. Index ETFs typically run 0.03% to 0.5% a year, while active funds that pick stocks can exceed 1%.

The expense ratio is not the whole cost, though. Trading commissions and other charges sit outside it, so your real drag can be higher. Check both the stated expense ratio and the total cost figure in the fund documents.