Expense Ratio
The annual percentage of your investment that a fund charges to operate, deducted automatically from returns.
What Expense Ratio means
The expense ratio is a fund's yearly operating cost expressed as a percentage of assets. A 0.60% expense ratio means $6 a year for every $1,000 invested.
You never write a check for it. It is subtracted from the fund's assets continuously, which is precisely why it is easy to ignore and why it does so much damage over time.
The difference between a 0.03% index fund and a 1.00% actively managed fund looks trivial and is not. Over 30 years on a $100,000 investment growing at 7%, that gap consumes roughly $180,000 of ending wealth.
Broad index funds and ETFs now routinely charge under 0.10%. For most investors, choosing low-cost funds is the single most reliable way to improve long-run returns, because costs are the one variable you actually control.
Related terms
Index Fund
A fund that mechanically tracks a market index rather than picking stocks, giving broad exposure at very low cost.
ETF (Exchange-Traded Fund)
A fund holding a basket of investments that trades on an exchange like a single stock, usually tracking an index at low cost.
Mutual Fund
A pooled investment holding a portfolio of securities on behalf of many investors, priced once a day after the market closes.
Target-Date Fund (TDF)
A single fund that holds a whole diversified portfolio and shifts automatically from stocks toward bonds as its target year approaches.
Robo-Advisor
An automated service that builds and maintains a diversified portfolio for you based on a short questionnaire, for a low annual fee.
Compound Interest
Interest earned on both your original money and the interest already added to it, which makes balances grow faster over time.
FIRE (Financial Independence, Retire Early)
A strategy of saving an unusually large share of income to build a portfolio big enough that continuing to work becomes optional.
Run the numbers
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