Expense ratio

How it works

You don’t get a separate bill for it. The fund pays its operating expenses out of its own assets, which lowers the value of every shareholder’s stake, so the cost shows up as a slightly lower return rather than a charge on your statement. The figure appears in the fee table near the front of the fund’s prospectus, labeled total annual fund operating expenses.

The ratio covers the fund’s ongoing costs: the adviser’s management fee, legal, accounting, and other administrative expenses, and, mainly in mutual funds, 12b-1 fees that pay for marketing and distribution. It leaves out sales charges called loads, redemption fees, brokerage commissions you pay to trade shares, and the costs the fund pays when it buys and sells its own holdings. A fee waiver may lower the ratio, sometimes only for a set period.

Because the charge repeats every year on whatever the balance has grown to, small differences can add up over long periods. If two funds earn identical results before costs, the one charging less leaves more in your account. Comparisons are most meaningful between funds with similar objectives, using the same balance to convert each ratio into dollars.

Related terms

Sources and further reading

• Investor.gov: Expense ratio
• Investor.gov: Mutual fund and ETF fees and expenses

Examples are illustrative and focus on U.S. personal finance. This page is educational, not individual financial, investment, tax, or legal advice. Read our editorial approach or report a correction.