An expense ratio is the annual fee a mutual fund or ETF charges, as a percentage of the money you have invested. A 0.20% expense ratio means you pay $0.20 per year for every $100 invested — deducted quietly from the fund's assets, so it shows up as a small drag on returns.
The formula is simply: annual cost = amount invested × expense ratio. Example (illustrative): on a $10,000 holding, a 0.03% expense ratio costs about $3 per year, while a 1.00% expense ratio costs about $100 per year — for funds that may hold very similar investments. The difference looks tiny in any single year, which is exactly why it is easy to ignore.
Fees compound against you the same way returns compound for you. A one-percentage-point-higher expense ratio, dragging on the balance every year for decades, can quietly consume a meaningful slice of your final compounded wealth — because you lose not just the fee, but all the future growth it would have earned. This is the core reason low-cost index funds and ETFs are a common starting point: the expense ratio is one of the few things about future returns you can control in advance.
It is a fund's annual fee expressed as a percentage of the money you have invested. A 0.20% expense ratio costs about $0.20 per year for every $100 invested, deducted quietly from the fund.
Annual cost equals amount invested times the ratio. Illustrative: on $10,000, a 0.03% ratio costs about $3 a year and a 1.00% ratio about $100 a year — small yearly, but it compounds over decades.
Fees compound against you: a higher ratio drags on the balance every year, and you lose not just the fee but all the future growth it would have earned. It is one of the few return factors you can control in advance.
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Educational research only — not investment advice.