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Glossary

Expense Ratio (ER)

Expense ratio (ER) measures the percentage of a fund’s assets used to cover management fees and operating costs, directly reducing the fund’s returns to investors.

Luca Moschini

— 1 min read

Definition

An expense ratio (ER), also known as a management expense ratio (MER), represents the percentage of a fund’s assets used to pay for management and operational expenses. These costs are deducted from the fund’s assets on an ongoing basis.

Because expenses are taken directly from assets under management, the expense ratio reduces the net return earned by investors over time.

How It Works

The expense ratio is calculated by dividing a fund’s total operating expenses by its average assets under management (AUM). Operating expenses may include management fees, administrative costs, and other ongoing fund expenses.

These costs are not billed separately to investors but are reflected in the fund’s net asset value as assets are reduced to cover expenses.

Why the Term Matters

The expense ratio directly affects investor returns by lowering the portion of fund assets available for growth. Even small differences in expense ratios can meaningfully impact long-term performance.

Expense ratios are commonly used to compare the cost efficiency of investment funds with similar objectives.

  • Assets Under Management (AUM)
  • Management Fees
  • Mutual Funds
  • Exchange-Traded Funds (ETFs)
  • Net Asset Value (NAV)

FAQs

What is an expense ratio?
An expense ratio is the percentage of a fund’s assets used to pay management and operational costs.

How is the expense ratio calculated?
The expense ratio is calculated by dividing a fund’s operating expenses by its average assets under management.

What costs are included in an expense ratio?
The expense ratio includes management fees and other ongoing operational expenses of the fund.

How does an expense ratio affect returns?
An expense ratio reduces returns by deducting costs directly from the fund’s assets.

Is the expense ratio charged separately to investors?
The expense ratio is not billed separately and is reflected in the fund’s net asset value.

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All content is provided for educational purposes only and does not constitute investment advice. Trading involves risk, and past performance is not indicative of future results. Please review our full Risk Disclosure for additional details.

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