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. Can mutual fund expense ratios be negative?

    Learn what an expense ratio is, and whether mutual funds, closed-end funds and exchange-traded funds can have negative expense ... 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. Do mutual fund trading costs hurt your bottom line?

    Find out how a mutual fund's expense ratio could be eating into your bottom line, what costs are included and an example ... Read Answer >>
Related Articles
  1. 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.
  2. Investing

    Stop Paying High Mutual Fund Fees

    Discover how investment strategies and expense ratios impact your mutual fund's returns.
  3. 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.
  4. 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.
  5. Trading

    Fund Costs and Expenses

    How much a fund charges for its services is the most important indicator of how well it will perform.
  6. 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.
  7. Retirement

    4 Roth IRAs with the Lowest Expense Ratios (SCHB, VTI)

    Discover why funds with low expense ratios are important for retirement portfolios, and find out about some of the lowest cost options available for a Roth IRA.
  8. Investing

    Why Expense Ratios Are Important To Investors

    Expense ratios aren't just numbers in a column. They make a palpable impact on your bottom line. Find out how.
  9. Investing

    Consider These Fees When Evaluating Mutual Funds

    The best way to evaluate a mutual fund is by digging a bit deeper into the fees charged.
RELATED TERMS
  1. Expense Ratio

    A measure of what it costs an investment company to operate a ...
  2. Gross Expense Ratio - GER

    The gross expense ratio (GER) is the total percentage of a fund's ...
  3. Before Reimbursement Expense Ratio

    The percentage of a fund's average net assets that is used to ...
  4. Total Annual Fund Operating Expenses

    For a mutual fund or other type of fund management structure, ...
  5. Index Fund

    An index fund is a type of mutual fund with a portfolio constructed ...
  6. Operating Ratio

    A ratio that shows the efficiency of a company's management by ...
Hot Definitions
  1. Retirement Planning

    Retirement planning is the process of determining retirement income goals and the actions and decisions necessary to achieve ...
  2. Drawdown

    The peak-to-trough decline during a specific record period of an investment, fund or commodity. A drawdown is usually quoted ...
  3. Inverse Transaction

    A transaction that can cancel out a forward contract that has the same value date.
  4. Redemption

    The return of an investor's principal in a fixed income security, such as a preferred stock or bond; or the sale of units ...
  5. Solvency

    The ability of a company to meet its long-term financial obligations. Solvency is essential to staying in business, but a ...
  6. Dilution

    A reduction in the ownership percentage of a share of stock caused by the issuance of new stock. Dilution can also occur ...
Trading Center