A:

A number of factors determine when an expense ratio is relatively high or low, but a good, low expense ratio is generally considered to be around 0.5-0.75% for an actively managed portfolio, while an expense ratio greater than 1.5% is considered on the high side.

An expense ratio is the cost investment companies charge investors to manage a mutual fund or exchange-traded fund, or ETF. This ratio is calculated by dividing a mutual fund’s operating expenses by the average total dollar value for all the assets within the fund.

The expense ratio for mutual funds is commonly higher than expense ratios for ETFs. The current average expense ratio for actively managed mutual funds is between 0.5% and 1.0% and typically goes no higher than 2.5%, although some fund ratios have gone as high as nearly 20%. For passive index funds, the typical ratio is closer to 0.25%. Expenses can vary significantly between different types of funds. The category of investment, the strategy for investing and the general size of the fund can all affect the expense ratio. A fund with a lower amount of assets usually has a higher expense ratio due to its limited fund base for covering costs. International funds can have high operational expenses if they require staffing in several countries. Large cap funds are generally less expensive than small cap funds.

Fund expenses can make a significant difference in investor profitability. If a fund realizes an overall annual return of 5%, but charges expenses that total 2%, then 40% of the fund's gross profit is taken up by fees. Therefore, it is very important for investors to compare expenses when researching funds. Investors can find a fund's expenses in a fund prospectus or listed on financial websites that freely offer information on mutual funds or ETFs.

RELATED FAQS
  1. Why is a mutual fund's expense ratio important to investors?

    Understand the nature of mutual fund expense ratios, and learn why it is critically important for investors to be aware of ... Read Answer >>
  2. What kinds of expenses are included in the expense ratio?

    Understand the variety of costs and charges that are included in the total expense ratio assessed to investors using mutual ... Read Answer >>
  3. Why do index funds tend to have low expense ratios?

    Understand what an index fund is and why the nature of index funds causes them to have lower expense ratios than more actively ... Read Answer >>
Related Articles
  1. Investing

    Is Your Low-Cost Index Fund Really Low Cost?

    Index funds and ETFs tend to have lower expense ratios than actively managed investments, but costs can vary widely among them. Investors should do their homework to understand how much they ...
  2. Investing

    The Lowdown on ETF Expenses

    Even small differences in an expense ratio can have a big impact.
  3. Financial Advisor

    ETF Gross vs. Net Expense Ratios: How They Differ

    If you're going to invest in ETFs, you should know the intricacies of expense ratios.
  4. Investing

    4 Expensive Mutual Fund Mistakes to Avoid

    Mutual funds are a good way to balance your asset allocation but there some potentially expensive pitfalls investors need to be aware of.
  5. Investing

    What You Need to Know About Mutual Funds

    Mutual funds are a good investment opportunity, but investors should know how they operate.
  6. Investing

    ETFs: Exploring Expenses in 2016 (BLK, ITOT)

    Take a good look at the latest trends in ETF costs. While passively managed funds have become less expensive, actively managed funds have not.
  7. Financial Advisor

    5 Characteristics of Strong Mutual Fund Shares

    Discover some of the basic characteristics shared by good mutual funds that investors can use to help them in selecting funds.
  8. Investing

    Trading Mutual Funds For Beginners

    Learn about the basics of trading and investing in mutual funds. Understand how the fees charged by mutual funds can impact the performance of an investment.
  9. Trading

    Fund Costs and Expenses

    How much a fund charges for its services is the most important indicator of how well it will perform.
  10. Investing

    Mutual Fund Fees: Here's What You're Paying For

    It is important to understand mutual funds fees so that you know what you are paying and to whom, and how that impacts your portfolio returns.
RELATED TERMS
  1. Expense Ratio

    A measure of what it costs an investment company to operate a ...
  2. Capped Fund

    A mutual fund that has a limited amount of operating expenses ...
  3. Before Reimbursement Expense Ratio

    The percentage of a fund's average net assets that is used to ...
  4. Index Fund

    An index fund is a type of mutual fund with a portfolio constructed ...
  5. Combined Ratio

    A measure of profitability used by an insurance company to indicate ...
  6. Investment Fund

    A supply of capital belonging to numerous investors that is used ...
Hot Definitions
  1. Fixed-Income Security

    An investment that provides a return in the form of fixed periodic payments and the eventual return of principal at maturity. ...
  2. Free Cash Flow - FCF

    A measure of financial performance calculated as operating cash flow minus capital expenditures. Free cash flow (FCF) represents ...
  3. Leverage Ratio

    Any ratio used to calculate the financial leverage of a company to get an idea of the company's methods of financing or to ...
  4. Two And Twenty

    A type of compensation structure that hedge fund managers typically employ in which part of compensation is performance based. ...
  5. Market Capitalization

    The total dollar market value of all of a company's outstanding shares. Market capitalization is calculated by multiplying ...
  6. Expense Ratio

    A measure of what it costs an investment company to operate a mutual fund. An expense ratio is determined through an annual ...
Trading Center