Focus on Fees: The Expense Ratio

To kick off our “Focus on Fees” series, we’ll take a look at one of the most common fees investors will encounter: the expense ratio.

If you own a mutual fund, you are paying this fee. It’s basically your cost of owning a mutual fund (however, as we’ll see, it doesn’t tell the whole story when it comes to expenses for a mutual fund). The expense ratio reflects the percentage of a fund’s assets that go toward its operating expenses (ie. management fees, distribution fees, etc.).

For example, if a fund’s annual expenses are $1.5 million and its assets under management (all the money that investors have invested in the fund) are $100 million, the fund’s expense ratio is 1.5%.

Expense ratios are taken directly out of the investor’s pocket. Since they eat into your returns, it’s important to know what the expense ratios are for the funds you own. It’s also important to understand that expense ratios can vary widely between funds.

The average mutual fund’s expense ratio is around 1.5%. However they can range from under 0.20% for low cost Vanguard index funds to well over 3% for some actively managed funds.

You might assume that if you pay more, you’ll get better returns. That would be a bad assumption. In fact, in any given year, about 80% of actively managed mutual funds fail to beat their benchmark.

Unlike many fees which can be hidden and difficult for investors to find, it’s easy to find the expense ratio for any mutual fund. Simply go to your favorite finance website and type in the fund’s ticker symbol.

In Google Finance, for example, at the very top of the screen you’ll find an area called “Key Statistics.” The expense ratio for your fund will be listed there. Here’s a link to the Google Finance page for the Vanguard Total Stock Market Fund. You can see that the expense ratio for this fund is a very low 0.19%.

That does it for the basics you need to know about expense ratios. As we mentioned, however, they don’t tell the whole story of what your costs are for owning a mutual fund. More on those costs in future “Focus on Fees” installments.

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