When investing, most people focus on how much they could make. But there’s another number worth watching: how much you’re paying to invest. Even a seemingly small fee can make a meaningful difference over time.
What is an expense ratio?
An expense ratio is the annual cost of operating a mutual fund or exchange-traded fund (ETF), expressed as a percentage of your investment. It covers expenses such as managing and administering the fund. Investor.gov
The fee is generally deducted from the fund’s assets, so you typically won’t receive a separate bill. You can find it in the fee table of the fund’s prospectus.
A simple example
Imagine investing $10,000 in one of two funds.
These are illustrative annual costs, assuming the investment value stays the same.
Now imagine paying those fees for 20 or 30 years. The difference can become much larger, because money spent on fees is no longer available to compound and potentially generate additional returns.
Money spent on fees can’t compound for you.
Why it matters
Lower fees allow investors to keep more of their returns, all else being equal. This is especially important for long-term investors using index funds, retirement accounts or other diversified investments.
The important part: cheapest isn’t automatically best
Different funds may follow different strategies, hold different investments or carry different levels of risk. The goal is to understand what you’re paying and what you’re getting in return.
Comparing fees is most useful when you’re evaluating funds with similar investment objectives.
One thing to remember
Investment returns aren’t entirely within your control. Investment costs are something you can compare and manage.
A fraction of a percentage point may seem insignificant today, but over decades small differences can have a surprisingly large impact. Sometimes building wealth isn’t just about earning more. It’s also about keeping more of what you earn.
Try it yourself: open the Grow Investments calculator and enter a $10,000 starting investment, $0 monthly contribution and 30 years. Run it once at 6.9% yearly growth (a 7% return minus Fund A’s 0.10% fee) and once at 6.0% (minus Fund B’s 1.00%). You’ll see about $74,017 versus $57,435.
Stay sharp, stay organized.
Educational content, not personalized investment advice. The 7% return is for illustration only; real investment returns vary from year to year and can be negative. Source: Investor.gov glossary: expense ratio.
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