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An expense ratio is the yearly fee a fund charges, expressed as a percent of your money. A 0.10% expense ratio means $10 per year for every $10,000 you have invested. A 1.00% expense ratio is $100 per year on the same balance.
Why this matters more than people think
On a single year, the difference looks small. But that fee comes out every year, and it compounds. Over 40 years on a $100,000 investment growing at 7%:
- 0.10% expense ratio: ends at roughly $1,440,000
- 1.00% expense ratio: ends at roughly $1,030,000
- Difference: $410,000, or 28% of your final balance
What's reasonable
- Index ETFs: 0.03% to 0.10% (excellent)
- Index mutual funds: 0.04% to 0.20% (good)
- Actively managed funds: 0.50% to 1.50% (rarely worth it)
- Anything above 1.5%: walk away unless you have a very specific reason
What this lesson is NOT
This lesson is about the cost of owning a fund, not its strategy or its returns. A lower fee is not automatically the right choice, and the cheapest fund is not always the best fit for what someone is trying to do.
Test what you learned5 questions · ~2 min
Quick check on this lesson
Answer each question and we’ll show you why the right answer is right, and why the others aren’t.
- 1.
What does an expense ratio represent?
- 2.
On a $10,000 investment, what would a 0.10% expense ratio cost you per year?
- 3.
Per the lesson's worked example, $100,000 invested for 40 years at 7%, comparing 0.10% vs 1.00% expense ratios, what's the approximate difference in final balance?
- 4.
According to the lesson, what's a reasonable expense-ratio range for index ETFs?
- 5.
Per the lesson's tip, what should you do if your 401(k) only offers high-fee funds?
0 of 5 answered
Reflection (private to you, stored locally)