An expense ratio is the percentage of a fund's assets used each year to pay its operating costs: the investment adviser's management fee, any 12b-1 distribution and service fee, and other expenses such as custody, legal, accounting and transfer-agent bills. Mutual funds and ETFs state it as total annual operating expenses divided by average net assets. Under SEC Rule 2a-4, every net asset value a US fund calculates includes expenses up to that date, so the cost arrives as a slightly lower share value rather than a bill. What is an ETF explains the fund structure behind the number, and the stocks hub the wider context.
How is an expense ratio calculated?
Divide a fund's operating expenses for its fiscal year by its average net assets over the same year, and express the result as a percentage.
In the US, Form N-1A, the SEC's registration form for mutual funds and most ETFs, has funds average their net assets at least monthly and round fee-table percentages to two decimal places. The total is built from these lines:
| Fee table line | What it pays for | Where you see it |
|---|---|---|
| Management fees | The investment adviser, including administrative fees paid to it | Every fund |
| Distribution and/or service (12b-1) fees | Selling and marketing shares, sometimes shareholder servicing | Mainly mutual fund share classes, rarely ETFs |
| Other expenses | Custody, legal, accounting, transfer agent and administration | Every fund |
| Acquired fund fees and expenses | The operating costs of other funds this fund owns | Funds of funds, including 98% of target-date mutual funds |
| Total annual fund operating expenses | The sum of the lines above: the expense ratio | The headline figure |
Worked example: Working out an expense ratio from a fund's annual report
A stock fund's statement of operations shows $2.4 million of management fees and $0.8 million of other expenses for its fiscal year, and no 12b-1 fee. Its net assets averaged $800 million over the year.
- Total operating expenses: $2.4 million + $0.8 million = $3.2 million
- Expense ratio: $3.2 million ÷ $800 million = 0.0040, or 0.40%
- In basis points: 0.40 × 100 = 40 bp
- Annual cost on a $15,000 holding: $15,000 × 0.0040 = $60, about 16 cents a day
What do 0.03% and 0.75% cost on $10,000 over 30 years?
At an assumed 5% a year before costs, $10,000 grows to $42,851 in 30 years at 0.03% but only $34,856 at 0.75%, a gap of $7,994.
We use 5% because it is the return the SEC tells US funds to assume in the cost example under every prospectus fee table. It is an illustration, not an expected return. Each year the expense ratio comes off the 5%, so the money compounds at 4.97% in the cheaper fund and 4.25% in the dearer one.
Worked example: 0.03% vs 0.75% on $10,000 for 30 years, at 5% before costs
| Years held | No costs | 0.03% expense ratio | 0.75% expense ratio | Gap between the two funds |
|---|---|---|---|---|
| 10 | $16,289 | $16,242 | $15,162 | $1,080 |
| 20 | $26,533 | $26,382 | $22,989 | $3,393 |
| 30 | $43,219 | $42,851 | $34,856 | $7,994 |
- 0.03% fund: $10,000 × 1.0497³⁰ = $42,851, after $198 of fees over the 30 years
- 0.75% fund: $10,000 × 1.0425³⁰ = $34,856, after $4,386 of fees
- The first year's fee is $3 against $75; by year 30 it is $12 against $251, because the charge is a percentage of a growing balance
- The 0.75% fund ends $8,363 short of the cost-free result: $4,386 paid in fees plus $3,977 of growth those fees would have earned
The gap between the funds comes to roughly 80% of the original $10,000, and more than half of it builds up in the final decade. To test other amounts, enter the return net of the fee, 4.97% or 4.25% here, in the compound interest calculator; how compound interest works explains why the shortfall outruns the fees themselves.
Where do you find a fund's expense ratio?
The authoritative figure is the fee table near the front of a US fund's prospectus, on the line labeled Total Annual Fund Operating Expenses.
- Prospectus. The table sits under "Fees and Expenses of the Fund", followed by what $10,000 would cost over 1, 3, 5 and 10 years at that 5% return.
- Shareholder reports. Annual and semiannual reports open with the period's "Costs of a $10,000 investment". They show actual spending rather than current estimated fees and leave out the costs of other funds the fund owns, so they can differ from the prospectus.
- Issuer websites. Vanguard's S&P 500 ETF lists 0.03%, while SPY is quoted to four decimals, 0.0945%; the SPY page charts that fund's price.
- Outside the US. Funds sold to retail investors in the European Union publish a key information document whose "Composition of costs" table lists "management fees and other administrative or operating costs" and portfolio "transaction costs" separately. Together they give a broader number than a US expense ratio, which excludes trading costs.
What is the difference between gross and net expense ratio?
The gross expense ratio is the fund's full operating cost; the net ratio is what remains after the adviser waives part of its fee or reimburses expenses.
Form N-1A bases the gross figure on the latest fiscal year as if no waiver existed. A fund may show the waiver and the net total on two extra lines only if the arrangement will cut expenses for at least a year from the prospectus date, and it must then say when the waiver is expected to end and who can end it. The SEC adds that waived fees may be recouped later.
Worked example: A fee waiver on a $25,000 holding
A fund's fee table shows total annual fund operating expenses of 0.60%, a fee waiver of (0.20%) and a net total of 0.40%, with the waiver contracted for one year.
- Cost while the waiver lasts: $25,000 × 0.0040 = $100 a year
- Cost if it lapses: $25,000 × 0.0060 = $150 a year, 50% more
- The prospectus cost example can reflect the waiver only for the period it is expected to last, so its 3-, 5- and 10-year figures use the gross 0.60% for the later years
The net ratio is what you pay today; the gross ratio is what you may pay once the waiver ends. The SEC says funds use waivers to attract or keep investors, and they move averages too: ICI notes that money market funds kept paring back waivers while short-term rates stayed relatively high, which lifted that category's average to 0.24% in 2025.
What does an expense ratio leave out?
It leaves out every cost charged outside the fund's operating budget: sales loads, account fees, brokerage commissions, bid-ask spreads and the fund's own trading costs.
| Cost | Inside the expense ratio? | Where it is disclosed |
|---|---|---|
| Management, 12b-1 and other operating expenses | Yes | Annual fund operating expenses |
| Acquired fund fees and expenses | In the prospectus total, but not in shareholder reports or financial highlights | Its own line above the total |
| Front-end and deferred sales loads | No | Shareholder fees, at the top of the fee table |
| Redemption, exchange and account fees | No | Shareholder fees |
| The fund's own commissions and trading costs | No | Portfolio turnover note and rate |
| Your broker's commission, the bid-ask spread and any ETF premium or discount | No | Your broker and the ETF's website |
| Adviser, wrap-program and platform fees | No | Your adviser's or platform's fee disclosure |
The fee table carries its own warning: its portfolio turnover note says the fund's transaction costs, such as commissions, "are not reflected in annual fund operating expenses or in the example" even though they affect performance. A fund that replaces much of its portfolio each year can therefore cost more than its ratio suggests, and the SEC adds securities-lending costs to the list of indirect costs outside it. How an ETF's price can sit above or below its net asset value is covered in that entry, the bid-ask spread entry prices the spread, and a fund's whole shortfall against its index, trading costs included, shows up in its tracking error.
What is a typical expense ratio?
In 2025, investors paid an asset-weighted average of 0.40% in equity mutual funds and 0.14% in index equity ETFs, according to the Investment Company Institute (ICI).
| Fund category, 2025 | Asset-weighted average | Simple average |
|---|---|---|
| Equity mutual funds | 0.40% | 1.08% |
| Index equity mutual funds | 0.05% | 0.47% |
| Index equity ETFs | 0.14% | 0.45% |
| Bond mutual funds | 0.36% | 0.81% |
| Target-date mutual funds | 0.27% | 0.64% |
| Money market funds | 0.24% | 0.40% |
A simple average counts every share class equally; the asset-weighted figure tracks what shareholders actually paid and is far lower because money collects in the cheapest funds. Actively managed equity mutual funds averaged 0.64% asset-weighted, and one in ten equity mutual fund share classes charged 1.84% or more. ICI links higher costs to sector, international and small-company strategies, whose holdings take more work to manage, and to small funds, which spread fixed audit and transfer-agent bills over fewer dollars. Index funds explained covers why indexing keeps costs down, and SPY vs VOO vs IVV compares three S&P 500 funds that each charge under a tenth of a percent.
What mistakes do people make with expense ratios?
The commonest mistake is treating the expense ratio as the whole cost of owning a fund, when loads, trading costs and taxes come on top.
- Misplacing the decimal. 0.75% is 75 basis points, or $75 a year per $10,000; 0.075% would be $7.50 and 7.5% would be $750.
- Reading the wrong share class. One mutual fund can issue several classes with different loads and 12b-1 fees. The SEC tells investors to match the ticker in a report or fee table to the class they own.
- Treating a waiver as permanent. The expected end date sits in a footnote to the fee table, and the net figure lasts only as long as the waiver does.
- Expecting the report to match the prospectus. The prospectus total includes acquired fund fees and current fees; the shareholder report shows the period's actual costs without them.
- Taking "zero-expense" literally. The SEC warns that funds advertising no or low expenses may collect for distribution in other ways, such as commissions on the purchase or a wrap fee charged as a percentage of assets.