Table Of Content
What Is Expense Ratio in ETF?
An expense ratio in an ETF (exchange-traded fund) is the annual fee you pay for the fund’s management and operation.
It's expressed as a percentage of your investment and automatically deducted from the fund’s assets—so you don’t see a separate charge.
For example, if an ETF has a 0.25% expense ratio, you’ll pay $2.50 per year for every $1,000 you invest. This covers costs like portfolio management, administration, and marketing.
While expense ratios may seem small, they can have a significant impact on long-term returns, especially with large or growing investments.
Investors often compare ETFs with similar holdings to find one with a lower expense ratio, especially in index funds, where cost savings can add up over time.
ETF Type | Typical Range | Example ETF (Ticker) |
|---|---|---|
U.S. Large-Cap Index | 0.03% – 0.10% | Vanguard S&P 500 (VOO) |
International Index | 0.08% – 0.20% | iShares MSCI EAFE (EFA) |
Bond ETF | 0.03% – 0.15% | iShares Core U.S. Aggregate Bond (AGG) |
Actively Managed ETF | 0.50% – 1.00% | ARK Innovation ETF (ARKK) |
Thematic or Sector ETFs | 0.30% – 0.80% | Global X Robotics (BOTZ) |
How Does Expense Ratio Calculated?
The expense ratio is calculated by dividing a fund’s total annual operating expenses by its average assets under management (AUM). This gives investors a sense of how much of their money goes toward fund costs each year.
Expense Ratio = Total Operating Expenses / Average AUM
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Example #1
An ETF manages $500 million and has $1.5 million in annual expenses.
Expense Ratio = 1.5 million / 500 million = 0.003 or 0.30% –> A $10,000 investment would cost about $30 per year.
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Example #2
A low-cost index ETF has $2 billion in assets and $2 million in expenses.
Expense Ratio = 2 million / 2 billion = 0.001 or 0.10% –> A $10,000 investment here costs just $10 annually.
How Expense Ratios Impact Investment Returns Over Time
Even small expense ratios can quietly eat into your returns, especially as your investment grows. Since fees are taken out annually, they compound along with your investment—but in reverse. That means the more you pay in fees, the less money stays in your account to grow over time.
Let’s say you invest $10,000 in two ETFs over 20 years:
ETF A, with a 0.10% expense ratio, grows at 7% annually.
ETF B, with a 1.00% expense ratio, also grows at 7%.
Over 20 years, ETF A grows to about $38,000, while ETF B reaches only $32,000—a $6,000 difference, all due to fees.
For long-term investors, especially those using ETFs for retirement savings, choosing lower expense ratios can make a noticeable difference.
Expense Ratio | Annual Fee (on $10K) | Value After 20 Years | Total Lost to Fees |
|---|---|---|---|
0.03% | $3 | $38,697 | $203 |
0.25% | $25 | $36,860 | $2,040 |
0.50% | $50 | $35,280 | $3,620 |
1.00% | $100 | $32,625 | $6,375 |
What Is a Good Expense Ratio for an ETF?
A “good” expense ratio for an ETF depends on the type of fund and its investment strategy.
For passive index ETFs, a low expense ratio—typically under 0.20%—is ideal. These funds aim to track a market index with minimal management, so higher fees usually aren’t justified.
For example, the Vanguard S&P 500 ETF (VOO) has an expense ratio of just 0.03%, making it one of the cheapest ways to invest in the U.S. market.
On the other hand, actively managed ETFs often charge more due to the cost of research and trading. Here, anything below 0.75% is considered reasonable, though you’ll need to weigh fees against performance.
How to Find an ETF’s Expense Ratio?
You can easily check an ETF’s expense ratio online before investing. Look in these places:
ETF provider’s website – Go directly to issuers like Vanguard, iShares, or Schwab. The fee is usually listed near fund performance or basics.
Brokerage platforms – Fidelity, Charles Schwab, Robinhood, and others display fees on the ETF’s summary page.
Financial data sites – Use Morningstar, Yahoo Finance, or ETF.com to look up fund details, including fees, performance, and comparisons.
Checking expense ratios takes just a few seconds—and can help you avoid costly choices over the long term.
Should You Avoid ETFs with High Expense Ratios?
Not always—but you should be cautious. High expense ratios eat into your returns year after year.
For example, if you invest $20,000 in an ETF charging 1.00%, you’re paying $200 annually in fees. A similar ETF charging 0.10% would only cost you $20 per year.
In some cases, high-cost ETFs may offer unique exposure—such as access to rare international sectors or specialty strategies.
For instance, an emerging markets ETF or an actively managed tech innovation fund might justify a higher fee if it consistently outperforms cheaper peers. But many do not.
If a high-fee ETF has poor long-term performance or can be replaced by a cheaper alternative, it’s probably best to skip it. Always compare fees and track record.
Over time, small differences in expense ratios can lead to thousands of dollars in lost gains.
FAQ
The expense ratio includes management fees, administrative costs, and sometimes marketing or distribution (12b-1) fees. It does not include brokerage fees or trading costs.
Yes, ETF providers can raise or lower expense ratios based on competitive pressure or changes in fund costs. It’s good to check periodically.
No, investors can’t deduct ETF expense ratios on their taxes since the fees are built into the fund’s performance and not paid directly.
Although listed as an annual percentage, fees are deducted gradually, usually daily, from the ETF’s net asset value (NAV).
Not always. A lower ratio helps returns, but performance also depends on the fund’s holdings, strategy, and market conditions.
Yes. Even if fees are the same, differences in portfolio composition or tracking error can lead to different results.
Sometimes. If the ETF has a strong track record of outperforming its benchmark, the extra fee might be justified.
No. Commissions are one-time charges when buying or selling, while expense ratios are ongoing annual fund costs.
Yes, every ETF has an expense ratio, though the amount varies depending on whether it’s passively or actively managed.
