What is "Expense Ratio" meaning?

The expense ratio is the annual fee charged by investment funds, such as mutual funds or exchange-traded funds (ETFs), to cover operational and management costs. This fee is calculated as a percentage of the fund's average assets under management (AUM). A lower expense ratio is generally favorable as it means less of the investor's money is being used for fees.

Example

"Investors often compare the expense ratio of different mutual funds to ensure they are not overpaying for management services."

How is "Expense Ratio" used in business?

In finance, the expense ratio is used to evaluate the cost-efficiency of an investment fund. A higher expense ratio may erode returns over time, so investors should factor this into their decision-making process when selecting funds.

Pro Tip

When choosing funds, consider both the expense ratio and the fund's performance history to assess whether higher fees are justified by superior returns.

Related Terms

Management Fees, Mutual Funds, ETFs, Asset Management