What Is an Expense Ratio and How Does It Affect Investors? 

 

Funds have operating and administrative expenses, and these come out of that fund’s assets. A fund’s expense ratio represents how much of an effect these expenses will have on investors’ returns. To find an expense ratio, use the following formula:

Expense Ratio =Operating expenses and management feesTotal fund assets

Usually, one of the biggest elements of operating expenses is an investment manager or advisor fees. Some other expenses that might be present include things like taxes, legal and accounting fees, and record-keeping and custodial fees. All of these expenses and fees reduce the value of the funds’ assets—they are not charged directly to any investor or account holder.

The expense ratio measurement shows how much of a fund’s assets go towards running the fund instead of going into investors’ pockets. Knowing what an expense ratio is and how it can affect you is important for investors, as it can be a major determiner in the appropriateness of a certain investment decision.

A high expense ratio means that a higher percentage of returns are withheld from the investor for the purposes of keeping the fund running. Keep reading to learn more about the ins and outs of expense ratios and your options.

Mutual Funds vs. Exchange Traded Funds (ETFs)

These two kinds of funds consist of a mixture of assets and can be good options for those wishing to diversify their portfolios. One of the main differences between mutual funds and ETFs is that mutual funds can only be purchased at the end of a trading day, while ETFs can be traded throughout the day like stocks. 

Mutual funds are known for being actively managed, which means that they may have higher operating costs and thus higher expense ratios. ETFs have often been passively managed in the recent past, sometimes leading to a lower expense ratio. This difference is going away as passive index funds become more prevalent within the assets of mutual funds and as the number of actively managed ETFs continues to grow

Uncovering Hidden Fees In Expense Ratios

Although skimming some money from assets is a must for any fund in order for them to cover costs and keep things running, the expense ratio can affect the size of your returns over time. Though almost all expense ratios are quite small, the difference between 1.5% and 0.2% can make a big difference over the course of several years.

As an investor, the expense ratio will likely not appear on any statements you receive. The statements show value after deduction. To become more familiar with the expense ratio of a fund, try logging into your account and looking for links and tabs such as “fund fees” or “facts”.

Researching the expense ratios of mutual funds and ETFs is a good idea for all investors, as even a small difference can significantly affect the size of returns in the long run.

 

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PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. All investments involve risk including the loss of principal.

If you’re pondering this situation, whether to invest all at one, please feel free to reach out to Michael Torrence at mtorrence@alphawealthfunds.com