What is an expense ratio?

An expense ratio is the annual fee a mutual fund or ETF charges as a percentage of your invested assets. A 0.10% expense ratio means you pay $10 per year for every $10,000 invested. It's deducted automatically from the fund's returns — you never write a check — but it compounds against you over time.

Every mutual fund and ETF charges an expense ratio — an annual fee expressed as a percentage of the fund's average net assets. It covers the fund's operating costs: management, administration, legal, marketing. The SEC requires funds to disclose their expense ratio in the prospectus and in the summary prospectus available at the fund's website. The ratio is deducted continuously from the fund's assets — it reduces the fund's net asset value (NAV) every day, proportionally. You don't pay a bill; the fee comes out automatically from what the fund earns.

What expense ratios look like across fund types

Passive index funds (ETF or mutual fund): Typically 0.03%–0.20%. The lowest-cost broad market index funds charge as little as $0.30–$1.50 per $10,000 invested per year.
Actively managed mutual funds: Typically 0.50%–1.50%, sometimes higher. A portfolio manager and research team are making investment decisions — those salaries are embedded in the fee.
Target-date funds: Variable — some are built on low-cost index funds (0.10%–0.15%); others use actively managed underlying funds (0.50%+).
Specialty / sector ETFs: Often higher than broad-market ETFs — 0.25%–0.75% is common for narrow-focus funds.

How expense ratios compound against you over time

The long-run cost of a 1% difference

You invest $50,000 and add $500/month for 30 years at a 7% gross annual return. Fund A charges 0.10%; Fund B charges 1.10%. After 30 years: Fund A grows to approximately $726,000; Fund B grows to approximately $600,000. The 1% annual fee difference costs you roughly $126,000 in ending wealth — not because the fee is large in any single year, but because it reduces the compounding base year after year.

The SEC's compound-interest calculator lets you model this for your own numbers. FINRA also notes in its investor education materials that expense ratios are a key factor to evaluate before selecting any fund, because expenses are one of the few variables you can control in advance.

Expense ratio vs. other fees

The expense ratio does not cover all possible fees. Mutual funds may also charge a sales load (front-end or back-end commission), which is separate from the expense ratio. ETFs may have bid-ask spreads — the cost of the gap between buy and sell prices, which can be significant for thinly traded ETFs. Some brokerages charge a transaction fee to purchase certain mutual funds. When comparing funds, look at total cost of ownership, not just the expense ratio in isolation.

What the SEC and FINRA say

Mutual funds and ETFs are required to disclose their fees in a fund prospectus and summary prospectus. Fees include the expense ratio and any sales loads. — SEC — Mutual Fund Fees and Expenses
Even small differences in fees and expenses can translate into large differences in returns over time. Fees and expenses are one of the key factors to consider when selecting mutual funds or ETFs. — FINRA — Mutual Funds
An ETF's ongoing expenses are measured by its expense ratio — the ratio of a fund's operating expenses to its average net assets. These expenses are deducted directly from the fund's assets. — SEC / Investor.gov — Exchange-Traded Funds (ETFs)

Key takeaways

The expense ratio is the annual fee deducted from a fund's assets — expressed as a percent, it compounds against your returns every year.
Passive index funds typically charge 0.03%–0.20%; actively managed funds typically charge 0.50%–1.50%.
A 1% annual expense ratio difference on $50,000 growing for 30 years can cost over $100,000 in ending wealth.
The expense ratio is not the only fee — watch for sales loads, transaction fees, and ETF bid-ask spreads.
Find a fund's expense ratio in its summary prospectus or on its fact sheet before investing.

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