Expense Ratios - Small Fees with Big Impacts

Investing is a daunting task for many individuals. For those new to investing, it is a minefield.

  • What funds do I buy?

  • What funds do I buy?

  • Which firm do I choose? (Fidelity, Vanguard?)

  • What risk level do I want?

The most overlooked factor? The expense ratio.

An expense ratio is an annual fee that investors, like you and me, pay a fund company for managing the investments. Both mutual funds and ETFs can have these fees.

These expense ratios are measured in percentages, such as 0.25%. This means on a $10,000 investment, your annual payment will be $25. ($10,000 × 0.0025 = $25.)


It may seem like a small percentage, but there can be big differences in an investor's returns over time.

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In investing, you get what you don't pay for.

Jack Bogle, founder of Vanguard

Jack Bogle introduced the first index mutual fund in the 1970s. He wanted to achieve broad diversification in a low-cost way. This allowed investors to maximize their returns and enabled them to grow their investments over time.

While most funds at the time were charging 1.0%-2.0% or more, Bogle came in and undercut everyone. His quote above emphasizes keeping more of your money for yourself rather than paying a high management fee.

High fees like the above may suit you. Maybe you want that style of investment. But be prepared. A high rate of return will need to account for a high fee, potentially lowering the overall net return.

Low fee ratios, like the above index funds, provide broad diversification while charging a minimal amount for the fund’s management.

Want to save a few bucks? Look for index funds that charge low fees, ideally 0.25% or lower. And compare funds! Some funds charge higher fees because it involves more oversight. Index funds usually charge lower fees because they are trying to match the performance of a broad index, like the S&P 500.

You can’t control the market or how your investments will perform, but you can control your costs. Choosing low expense ratios will ultimately save more money over time and prevent you from stepping on too many mines in this minefield.