The expense ratio is a financial metric that measures the annual operating expenses of a fund as a percentage of its total net assets. It represents the fees investors pay for fund management, administration, and other costs, directly impacting investment returns.

To calculate the expense ratio: Determine the total annual expenses of the fund, obtain the total net assets, divide the expenses by the assets, and multiply by 100. Example: If a fund has $1,000,000 in expenses and $100,000,000 in assets, the expense ratio is (1,000,000 ÷ 100,000,000) × 100 = 1%.

A 0.75% expense ratio means you pay $75 annually for every $10,000 invested in the fund. This is considered a good rate for actively managed funds, offering balance between professional management and cost efficiency.

A good expense ratio depends on fund type: Below 0.5% is low (excellent for index funds), 0.5% to 0.75% is good (standard for actively managed funds), and above 0.75% is high (may significantly reduce returns). Always compare within the same fund category.

The expense ratio directly reduces your investment returns. A 1% expense ratio means you lose 1% of your returns annually to fees. Over 20 years, a 1% difference in expense ratio can reduce your portfolio value by tens of thousands of dollars due to compound interest.

The expense ratio is important because it helps investors assess cost efficiency, allows comparison of funds across providers, impacts long-term investment growth, and affects retirement planning. Lower expense ratios typically lead to higher net returns over time.