Expense ratio.
In plain English
Every mutual fund and ETF has an expense ratio, expressed as a percentage of assets. It pays the fund's managers, recordkeepers, and operating costs. You never see it as a line item on your statement. It's deducted from the fund's returns before they're reported to you. A 0.50% expense ratio means $5 per year out of every $1,000 invested, every year.
01Why it matters
Over a career, fees compound just like returns. The difference between a 0.05% fund and a 0.75% fund on the same balance, over 30 years, can easily exceed $100,000 in lost growth. That's the same fund, the same market, just different fees. Watching expense ratios is the single highest-leverage thing a long-term investor can do, after picking a savings rate.
02The math, step by step
Two people invest $500/month for 30 years and earn 7% before fees. Person A picks funds averaging 0.05% expense ratio. Person B picks funds averaging 0.75%. After 30 years: Person A has about $607,000. Person B has about $551,000. The $56,000 gap is fees alone.
Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.
03What this is NOT
An expense ratio is annual and ongoing, it gets charged every year you own the fund. A sales load (charged by some older mutual funds) is a one-time charge at purchase. They're separate. Modern index funds usually have no sales load and very low expense ratios; some older actively managed funds have both.
Plain-English answers from our glossary. Receipts included. Never advice.
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