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What Is the Expense Ratio?

The expense ratio is the ongoing cost charged for management and administration for as long as you hold a mutual fund or ETF.

Relationship to net asset value

The expense ratio is quoted as an annual rate, but in practice it is calculated on a daily basis and deducted continuously as part of the fund's net asset value calculation. Investors do not need to make a separate payment, but the cumulative impact grows larger the longer the holding period.

What to keep in mind

Index funds generally tend to have lower expense ratios, while actively managed funds tend to have higher ones. Even a small difference in the rate can affect the final amount of assets accumulated over the long term through the effect of compounding, so it is worth checking this in advance in the prospectus.

This article is provided for general informational purposes only and does not recommend or solicit the purchase or sale of any specific investment method or security. Final investment decisions are your own responsibility.

Frequently Asked Questions

When and how is the expense ratio paid?
The expense ratio is automatically deducted from the fund's daily net asset value throughout the holding period. There is no separate payment required at a service counter when you buy or sell, which makes it a cost that is easy for investors to overlook, even though it steadily reduces returns.
Is a lower expense ratio always better?
The expense ratio is just one component of cost, and a low ratio does not necessarily mean the fund is superior. It is important to also check the fund's investment policy, the benchmark it tracks, and its actual investment performance.

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