An expense ratio measures how much you'll pay over the course of a year to own a fund. It is an essential metric to consider when evaluating investment options. The expense ratio represents the total percentage of a fund's assets used for administrative and operational expenses. It's charged on an annual basis and can have a significant impact on your overall returns.
A high expense ratio can significantly impact your investment performance. The higher the expense ratio, the more costs eat into your returns. It's crucial to consider this factor when choosing funds for your portfolio. Lowering your expense ratio can help you maximize your investment returns over time.
In real life, the expense ratio is calculated by dividing the fund's operating costs by its total assets. For example, if a fund spends $100,000 a year on operating costs and has $10 million in assets, its expense ratio would be 0.01, or 1%.