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 (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 0.2%.
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. With an average expense ratio of 1.25% large cap funds are generally less expensive than small cap funds, which average 1.4%.
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.