Buhata
Login Start for Free

Home › Life Terms

Saving and investing basics

Expense ratio

The yearly share of a fund's assets used to pay its running costs, so a 0.40% expense ratio costs $40 a year for every $10,000 invested.

What It Means

An expense ratio is the percentage of a mutual fundMutual fundAn SEC-registered fund that pools money from many investors to buy stocks, bonds or other securities, with shares you can sell back to the fund each business day. See more's or ETFETFAn exchange-traded fund: a pooled investment fund whose shares trade on stock exchanges throughout the day at market prices. See more's average net assetsAssetsThings you own that are worth money, such as cash, investments, a home or a car. Your assets minus your debts is your net worth. See more that goes each year to pay the fund's operating costs. Investor.gov lists what can sit inside it: management fees, distribution or service fees (called 12b-1 fees), acquired fund fees and other expenses. Nobody sends you a bill for it. The fund takes the cost out of its assets, so it lowers your return a little every year you own it.

Try It: Compare Two Expense Ratios Over the Years

Put in an amount and two expense ratios. Both funds earn the same example return before costs, so cost is the only difference.

Fund A: cost in year one$40Value at the end$29,736
Fund B: cost in year one$14Value at the end$31,235
Gap between the two$1,499

Fund B ends ahead by the gap, and all of it comes from cost.

How People Say It

  • "What's the expense ratio on that fund?"
  • "It's forty bucks a year per ten grand, which is fine."
  • "I switched to the cheaper index fund for the fees."

The Breakdown

Formula

Cost for the year in dollars = amount invested × expense ratio ÷ 100. At 0.40%, $1010,000 stepsA popular daily step goal that began as the name of a 1960s Japanese pedometer; later studies find health benefits begin well below it. See more,000 costs $40 for the year.

Worked example. Two funds each start with $10,000 and earn an example 6% a year before costs for 20 years. The calculator uses a simplified model that takes each fund's expense ratio off the return every year.

Fund AFund B
Expense ratio0.40%0.14%
Cost in year one$40$14
Return after costs5.60%5.86%
Value after 20 years$29,736$31,235

Fund B finishes about $1,499 ahead. In year one the difference is only $26, yet it widens because money paid out in fees no longer grows with the rest of the account.

What the result means. A few hundredths of a percent look like nothing on a fact sheet. Over decades they add up to real dollars, which is why it pays to compare the ratios of funds that do the same job.

Benchmark. The Investment Company Institute (ICI) reports fund costs as asset-weighted averages, so a large fund counts for more than a small one. For 2025, ICI puts the average at 0.40% for equityHome equityThe part of your home you own outright: its current value minus everything you still owe on loans secured by it. See more mutual funds, 0.36% for bond mutual funds and 0.14% for index equity ETFs. The two example rates above are the first and third of those figures. Use them as a rough yardstick, since a weighted average leans toward the biggest funds.

Good to Know

Investor.gov says you'll find the expense ratio in the fee table near the front of a fund's prospectus. The ratio covers the fund's own operating costs. A commission your broker charges each time you buy or sell is a separate cost and won't show up in it. Compare funds of the same kind: an index stock fund, a bond fund and an actively managed fund have different jobs and different typical costs.

FAQ

What is a good expense ratio?

There's no official cutoff. ICI's asset-weighted averages for 2025 were 0.40% for equity mutual funds and 0.14% for index equity ETFs, so compare any fund with others of the same type.

Do I pay the expense ratio as a separate fee?

No bill arrives. The fund pays its operating costs out of its assets, per Investor.gov, so the charge is already reflected in the fund's value and your returns.

Where do I find a fund's expense ratio?

Look in the fee table in the fund's prospectus, which Investor.gov names as the place it's listed. Check it again each year when you review what you own.

Do It in Buhata

Accounts, Reminders

Add each fund you own to Accounts in Buhata and set a yearly Reminder to check its expense ratio in the latest prospectus.

Open Buhata

Related Terms and Categories

  • Index fund

    A mutual fund or ETF that aims to track the return of a market index, such as the S&P 500, instead of picking investments to beat it.

  • Mutual fund

    An SEC-registered fund that pools money from many investors to buy stocks, bonds or other securities, with shares you can sell back to the fund each business day.

  • ETF

    An exchange-traded fund: a pooled investment fund whose shares trade on stock exchanges throughout the day at market prices.

  • Fee-only advisor

    An advisor paid only by the client, through hourly, flat, retainer or asset-based fees, who takes no commissions on the products they recommend.

  • Robo-advisor

    An online investment adviser that uses computer algorithms to build and manage a portfolio for you from your answers to a questionnaire.

  • Compound interest

    Interest paid on your original amount and on the interest it has already earned, so each year's interest is a little bigger than the last.

Saving and investing basics

Sources

Investor.gov, "Expense Ratio" (glossary); Investment Company Institute, "Mutual Fund and ETF Fees Remained Near Historic Lows in 2025"; Investment Company Institute, "Trends in the Expenses and Fees of Funds, 2025: Key Findings"

Last updated .