An expense ratio is a fund's annual operating expenses expressed as a percentage of average net assets. A 0.60% expense ratio on a $10,000 average balance is about $60 for one year before changes in balance and daily expense accrual; a fee reduces assets available to earn later returns, so its long-term effect exceeds one year's dollar charge.
What expense ratio means
An expense ratio is the annual percentage of a fund's average net assets used for operating expenses. Expense ratio is an ongoing fund-cost measure; ETF versus mutual fund describes how fund shares are bought and sold.
| Average balance | $10,000 |
|---|---|
| Expense ratio | 0.60% |
| One-year approximation | $60 |
| Gross return illustration | 7.00% |
| 20-year net-return illustration | 6.40% |
What is an expense ratio, and how does it reduce investment returns?: worked numbers
At a 7.00% gross annual return, $10,000 growing for 20 years becomes about $38,697 before the illustration's fee. Reducing the modeled annual return by a 0.60% expense ratio to 6.40% gives about $34,590. The roughly $4,107 gap is a compounding comparison, not a forecast or an invoice.
How to calculate expense ratio
Approximate annual expense dollars as average assets × expense ratio. For a long-horizon illustration, compare compounded balances at gross return and at gross return minus the stated annual percentage, while recognizing that actual funds accrue expenses differently.
Use related Calculatort tools when the inputs are known: twenty-year fund-fee calculator; investment growth projection; ETF trading comparison.
Common mistakes
Do not enter 0.60% as 0.006% in a calculator, subtract a fee twice from a return already reported net of expenses, or compare different share classes without checking their fee tables.
Where the calculation stops
Transaction costs, loads, advisory fees, taxes, waivers, performance, risk, deposits, withdrawals, and daily expense accrual are outside the simplified calculation.
expense ratio: source and verification
The SEC's Investor.gov bulletin identifies total annual fund operating expenses as the expense ratio, expressed as a percentage of average net assets. Read the named source. This source names the transaction-specific average balance and the conditions that qualify it.
Use the result as a dated scenario
Recalculate the expense ratio case when its listed input changes.