1. What is the Expense Ratio?

The Expense Ratio (ER) is an annual fee expressed as a percentage of assets under management (AUM) that mutual funds and ETFs charge to cover operational expenses. It represents the cost of owning the fund.

2. How Does the Calculator Work?

The calculator uses the Expense Ratio formula:

Where:

• \( ER \) — Expense Ratio (%)
• \( Expenses \) — Total annual operating expenses (USD)
• \( AUM \) — Assets Under Management (USD)

Explanation: The formula calculates what percentage of the fund's assets are used to cover annual operating expenses.

3. Importance of Expense Ratio

Details: Lower expense ratios generally lead to better investment returns over time. Even small differences in expense ratios can significantly impact long-term investment growth due to compounding effects.

4. Using the Calculator

Tips: Enter total annual operating expenses and assets under management in USD. Both values must be positive numbers. The calculator will compute the expense ratio as a percentage.

5. Frequently Asked Questions (FAQ)

Q1: What is considered a good expense ratio?
A: For index funds, expense ratios below 0.20% are generally considered good, while ratios below 0.10% are excellent. Actively managed funds typically have higher expense ratios.

Q2: How does expense ratio affect returns?
A: The expense ratio is deducted from the fund's returns annually. A 1% expense ratio means you pay $10 annually for every $1,000 invested.

Q3: What expenses are included in the ratio?
A: Management fees, administrative costs, marketing expenses (12b-1 fees), and other operational costs are included in the expense ratio calculation.

Q4: Is expense ratio the only cost to consider?
A: No, investors should also consider transaction costs, sales loads, and account fees, though these are typically separate from the expense ratio.

Q5: Why are index fund expense ratios lower?
A: Index funds require less active management and research, resulting in lower operating costs compared to actively managed funds.