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Expense Ratio

The expense ratio measures the costs associated with owning a mutual fund or an exchange-traded fund (ETF). It represents the percentage of a fund's assets used to cover various operating expenses, such as management fees, administrative costs, marketing expenses, and other operational charges.

What You Need To Know

The expense ratio is calculated by dividing the total annual expenses of the fund by its average net assets. Over the long term, even seemingly small differences in expense ratios can have a significant impact on investment performance. Lower expense ratios generally indicate that a higher percentage of an investor's money is working toward potential investment returns. A higher expense ratio can result in lower net returns for investors.

The expense ratio is disclosed in a fund's prospectus and other regulatory documents. It provides investors with transparency and allows them to compare the costs of different funds before making investment decisions.

Expense ratios can vary depending on the type of fund. Passive funds, such as index funds or ETFs, which aim to replicate the performance of a specific market index, generally have low expense ratios. Active funds involve more extensive research and management, leading to higher expense ratios.

Note that expense ratios do not capture all costs associated with investing, such as transaction fees or brokerage commissions. These additional costs can vary depending on the investor's trading activity and the platform used. Additionally, when selecting funds, investors should consider the expense ratio in conjunction with other factors, such as fund performance, investment strategy, and risk profile, to make informed investment decisions.