What Are "Expense Ratios?"

For the new investor considering mutual funds, one important comparison basis is their expense ratio.

The expense ratio is the operating cost of a fund, including fees (or “loads”), and it is passed on to investors.

Expense ratios are expressed in a percentage. For example, a $10,000 investment with a 0.2% expense ratio results in $20 in yearly expenses (100,000 * .002).

Funds with lower expense ratios are seen by some as delivering better investor value. For this reason, many are attracted to “no-load” index funds and no-load index exchange traded funds (ETFs), which are managed mainly by a computer.

Recently, we plunked down a chunk in our first mutual fund, the Vanguard 500, a no-load index fund that tries to mirror the performance of the S&P 500, and has an expense ratio of 0.18%

For further discussion, check out:
An Argument For Index Funds
Comparing Index ETFs and Mutual Funds

— BEN POPKEN

(Photo: Getty)