Glossary · Funds and derivatives
Expense ratio
An expense ratio is a fund’s yearly fee, written as a percent of your money in it: 0.5% means $5 a year on every $1,000.
Also called: fund fee, management fee, TER, total expense ratio, ongoing charge
$10,000 in the S&P 500 from Oct 1996: $186,117 with no fee, $137,671 with a 1% fee.
It left $101,524.
In plain words
A gym charges a monthly membership; a fund charges a yearly one. The expense ratio is that fee, written as a share of what you have in the fund. A fund with a 0.2% expense ratio takes $2 a year for every $1,000 you hold; one at 1.5% takes $15.
You never get a bill. The fund takes a tiny slice of its assets every day, so the price of a share is a little lower than it would otherwise be. The fee pays the managers, the staff, the accounts and the marketing.
Fees look tiny because they are quoted per year, but they are charged every year on a growing pot, so they compound against you, just as returns compound for you.
Example
The fee on $10,000
- Year 1: a 1% fee on $10,000 costs $100. It looks small.
- But the fee is charged on the whole pot, every year. If the pot grows at 7% before fees, by year 20 it holds about $30,000, and the fee takes about $300 that year.
- Over 30 years the 1% fee leaves you with $57,435 instead of $76,123: $18,688 less, almost twice the money you put in.
A fee of 1% a year took a quarter of the final result. A fee of 0.1% took less than 3%.
One level deeper
The expense ratio covers the running costs of the fund: the management fee, administration, custody, legal and accounting, and in some US funds a marketing fee (12b-1). It does not include sales charges (loads) or the trading costs inside the fund, which are reported separately or not at all.
Fees have fallen a long way. Big index funds and ETFs that follow the S&P 500 now charge 0.02% to 0.10%; actively managed stock funds often charge 0.5% to 1% or more; hedge funds traditionally took 2% a year plus a fifth of the gains.
Over 30 years in the real S&P 500, a fee of just 0.03% would have cost 0.9% of the result, a fee of 1% 26% and a fee of 2% 45%.
$10,000 in the S&P 500 thirty years ago, by yearly fee
The same market and the same dividends since Oct 1996; only the fee differs. With no fee at all, $10,000 grew to $186,117. A 2% fee would have taken $84,593 of that.
The numbers behind the chart
| Value | |
|---|---|
| No fee | $186K |
| 0.03% a year | $184K |
| 0.1% a year | $181K |
| 0.25% a year | $173K |
| 0.5% a year | $160K |
| 1% a year | $138K |
| 1.5% a year | $118K |
| 2% a year | $102K |
Why it matters
The fee is one of the few things about a fund you know for sure in advance. Returns are uncertain; costs are not.
Differences that look tiny compound into big sums over a working life.
A high fee is a hurdle: an active fund charging 1% must beat its index by 1% a year just to keep up with a cheap index fund.
A common mistake
Myth: A 1% fee costs me 1% of my money, once.
In fact: It costs 1% every year, on a pot that keeps growing, so it compounds. Over 30 years in the S&P 500, a 1% fee took 26% of what the money would have become.
Questions people ask
What is a good expense ratio?
It depends on the kind of fund. For a broad index fund or ETF, 0.02% to 0.20% is common. Actively managed and specialist funds cost more, often 0.5% to 1%. Lower is better only if the fund does the same job.
Where do I find a fund’s expense ratio?
In its fact sheet and prospectus, usually near the top, and on any broker’s page for the fund. Look for “expense ratio”, “total expense ratio” or, in Europe, “ongoing charges”.
Is the expense ratio taken out of my returns?
Yes. It is deducted from the fund’s assets a little every day, so the returns a fund reports are already after the fee. You do not pay it separately.
Read more on BigCapital
About the numbers
- The numbers on this page are recalculated from the data every night; the sources are listed at the end of the page.
- S&P Composite price and total return since 1871, and US consumer prices: Robert J. Shiller, Online Data (shillerdata.com); total return with dividends reinvested monthly, calculated by BigCapital.
- The chart and the facts are a model: the S&P 500 with dividends, less a fee charged every month. Real funds also pay trading costs, and investors pay taxes.
- This page explains a term. It is not investment advice.