Expense ratio

In more detail

The fee is not billed separately: the fund deducts it from its assets, a little each day, so it shows up only as a lower return. It covers management, administration and other operating costs, but not trading costs inside the fund, sales loads or platform fees, which come on top. Broad index funds often charge well under 0.2% a year; actively managed funds commonly charge more. Because the fee is taken every year from a growing balance, it compounds just as returns do.

Why it matters

A fee difference that looks tiny as a percentage becomes a large amount over decades, and unlike future returns it is certain. When two funds track the same index, the cheaper one usually wins.

Example

$10,000 growing at 7% a year before fees for 30 years (compounded monthly):

The 1% fund leaves you $18,554.05 less than the 0.1% fund. In cash terms, a 0.5% ratio on a $50,000 holding costs $250 a year.