You're reading for free via Tunji Onigbanjo's Friend Link. Become a member to access the best of Medium.
Member-only story
What Is an Expense Ratio?
A measure of how much of a fund’s assets are used for expenses
An expense ratio is a ratio that measures how much of a fund’s assets are used for administrative and other operating expenses such as recordkeeping, custodial services, taxes, legal expenses, accounting fees, and auditing fees. In a fund such as an exchange-traded fund (ETF), the expense ratio is deducted from the fund’s gross return and paid to the fund manager. An expense ratio is a ratio you should be familiar with before investing in a fund.
The formula for expense ratio is as follows: Expense Ratio = Total Fund Costs / Total Fund Assets. For example, let’s say that the ABCD ETF has total fund costs of $40,000,000 and total fund assets of $100,000,000,000. $40,000,000 / $100,000,000,000 = 0.0004. Expressed as a percentage, that is an expense ratio of 0.04%.
The lower the expense ratio, the better it is considered for the average investor. Actively managed funds typically have a higher expense ratio due to more changes being made to their holdings periodically. In comparison, passively managed funds that correspond with an index typically have a lower expense ratio. According to the Investment Company Institute, the average expense ratio for actively managed equity funds was 0.68% compared to 0.06% for index equity funds.
The next time you invest or reinvest in any fund, look at its expense ratio. Determine where it aligns with your investment style and how it may impact your returns for the next 5, 10, or 15 years. It is important to note that most expenses within a fund are variable, meaning that a fund’s expense ratio can rise or fall over time. Becoming understanding of expense ratios will assist you in becoming understanding what you want for your investment portfolio.
Subscribe to DDIntel Here.
Visit our website here: https://www.datadriveninvestor.com
Apply code: DDI2022 for a 30% OFF for Black Friday SALE.
