Jun 2nd, 2008
Working Backwards: What’s an Expense Ratio?
An expense ratio is a way to understand the costs of operating a mutual fund. The operating expenses associated with a fund [usually the fee for the fund manager, bookkeeping fees, accounting fees, auditing fees, taxes, and marketing costs (the infamous 12b-1 fee) are some of these expenses] are combined, then divided by the average dollar value of its assets. These expenses are taken from the fund’s assets and, as you would expect, reduce the return investors experience.
Expense ratios are expressed as a percentage. Typically, passively managed index funds have very low expense ratios; for example, the Vanguard Total Stock Market Index Fund (VTSMX) has an expense ratio of .15%–that’s right, well under a single percentage point.
Expense ratios do not include loads, taxes, or surrender charges, which can add heavily to your costs. Sticking to no load, passively managed index funds with low expense ratios is one of the best ways to maximize your returns by minimizing your costs. Pay attention to the expense ratios of your funds and you will help your bottom line!
