{"id":4425,"date":"2024-10-07T10:10:40","date_gmt":"2024-10-07T10:10:40","guid":{"rendered":"https:\/\/smartspending.ai\/what-is-an-expense-ratio-and-whats-a-good-one\/"},"modified":"2024-10-07T08:04:00","modified_gmt":"2024-10-07T08:04:00","slug":"what-is-an-expense-ratio-and-whats-a-good-one","status":"publish","type":"post","link":"https:\/\/finderica.com\/?p=4425","title":{"rendered":"What is an expense ratio and what\u2019s a good one?"},"content":{"rendered":"\n
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When it comes to investing in mutual funds or exchange-traded funds (ETFs), one of the most important factors to consider and understand is the expense ratio. An expense ratio measures how much you\u2019ll pay over the course of a year to own a fund. A high expense ratio can significantly impact your returns, and it pays for things like the management of the fund, marketing, advertising and any other costs associated with running the fund. Both mutual funds and ETFs charge an expense ratio.<\/p>\n

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When someone discusses how expensive a fund is, they\u2019re referring to the expense ratio. Here\u2019s how expense ratios work and what makes a good expense ratio.<\/p>\n

How expense ratios work<\/h2>\n

An expense ratio is the cost of owning a mutual fund or ETF. Think of the expense ratio as the management fee paid to the fund company for the benefit of owning the fund.<\/p>\n

The expense ratio is measured as a percent of your investment in the fund. For example, a fund may charge 0.30 percent. That means you\u2019ll pay $30 per year for every $10,000 you have invested in that fund.<\/p>\n

You\u2019ll pay this on an annual basis if you own the fund for the year. Don\u2019t assume you can sell your fund just shy of a year and avoid the cost, however. For an ETF,\u00a0 the management company will take the cost out of the fund\u2019s net asset value daily behind the scenes, so it will be virtually invisible to you.<\/p>\n

Why it\u2019s important to understand expense ratios<\/h2>\n

Buyers of mutual funds and ETFs need to know what they\u2019re paying for the funds. A fund with a high expense ratio could cost you 10 times \u2013 maybe more \u2013 what you might otherwise pay.<\/p>\n

Typically, any expense ratio higher than 1 percent is high and should be avoided. Over an investing career, a low expense ratio could easily save you tens of thousands of dollars, if not more. And that\u2019s real money for you and your retirement. However, it\u2019s important to note that many investors choose to invest in funds with high expense ratios if it\u2019s worth it for them in the long run.<\/p>\n

Here\u2019s some good news for investors: Expense ratios have been declining for years. Many passive funds out there have expense ratios below 0.10 percent, or $10 annually for every $10,000 invested, while a few have expense ratios of 0 percent, which is great for investors.<\/p>\n

What\u2019s a good expense ratio?<\/h2>\n

To determine how good an expense ratio is, you can measure it in two ways:<\/p>\n