Quick answer
An expense ratio is the percentage of a fund's average net assets used each year to pay its operating expenses, such as management fees and 12b-1 fees [1]. You do not get a bill; the cost is taken from the fund's assets.
#What does the expense ratio include?
Investor.gov lists the parts: management fees, distribution and/or service fees (called 12b-1 fees), acquired fund fees and expenses, and other expenses [1]. Management fees go to the fund's investment adviser for managing the portfolio, and 12b-1 fees cover marketing and selling fund shares [2].
#How is the expense ratio paid?
You never write a check for it. The SEC's fee bulletin explains that when fees are paid out of fund assets, the value of the fund decreases, and so does the value of every investor's shares [2]. That is why the cost is easy to overlook. Sales loads and account fees are separate and can come on top; see expense ratios and fund fees.
#How much can a small difference cost?
Worked example
0.05% versus 0.75% over 20 years
Two funds each start with $10,000 and earn the same hypothetical 6% a year before fees. The fee is taken at the end of each year from the balance.
- First-year fee at 0.05% ($10,600 after growth × 0.05%)
- $5.30
- First-year fee at 0.75% ($10,600 after growth × 0.75%)
- $79.50
- Value after 20 years at 0.05%
- $31,752.16
- Value after 20 years at 0.75%
- $27,588.47
- Gap between the two
- $4,163.69
The only difference is the fee, yet the gap after 20 years is more than $4,000 because fees also remove the growth those dollars would have earned.
Hypothetical, simplified figures. Real returns vary year to year and can be negative; taxes and other costs are ignored.
Investor.gov puts it plainly: even small differences in fees can mean large differences in returns over time [3]. You can test your own numbers with the fee impact calculator.
Related terms
Frequently asked questions
Do ETFs have expense ratios?
Yes. ETFs, like mutual funds, must show a standardized fee table in the prospectus, and the yearly operating expenses appear there as a percentage of assets [2].
Is a lower expense ratio always the better fund?
Cost is one factor among several. Two funds can follow very different strategies, so compare what each fund holds and its risks, not just the fee.
Does the expense ratio include trading commissions I pay?
No. Commissions or fees your broker charges you to buy or sell fund shares are separate from the fund's own operating expenses.
Sources
Grade A = primary source (regulator, government agency, official rulebook or the index provider's own documents). Numbers in brackets in the text point here.
- U.S. SEC — Investor.gov. Expense Ratio (glossary) (2026). Accessed 2026-10-03.A
- U.S. SEC — Investor.gov. Mutual Fund and ETF Fees and Expenses — Investor Bulletin (2025). Accessed 2026-10-03.A
- U.S. SEC — Investor.gov. Mutual Funds (2026). Accessed 2026-10-03.A
This page is general education, not personal financial, tax or legal advice. Figures in worked examples are hypothetical and calculated before taxes and fees unless stated. Rules and limits change; check the linked primary sources for the current version. How we check every page.
