Glossary / Markets

Expense ratio

The expense ratio is the annual percentage of assets a fund deducts to cover its running costs, charged continuously and reflected in the fund's price rather than billed separately.

It compounds against you. Fifty basis points a year over twenty five years is a meaningful share of the total return, taken quietly.

It is also the most visible cost and therefore the one investors optimise hardest, sometimes at the expense of costs that matter more.

Where people get it wrong

Optimising the expense ratio while ignoring domicile. For a non-US investor the withholding tax difference between fund domiciles can dwarf a few basis points of fee.

The framework behind it Fund domicile, and the sixty thousand dollar trap sets out the rule, the arithmetic and where it breaks.

Read the framework

Related terms

Index fund An index fund is a fund that holds the constituents of a published index in their published weights rather than selecting them, which removes manager judgement and most of the cost that comes with it. Fund domicile A fund's domicile is the country in which it is legally established, and it determines the withholding tax the fund suffers on its holdings and the estate tax exposure of the person who owns it. Tracking difference Tracking difference is the gap between a fund's actual return and the return of the index it follows over a period, and unlike the expense ratio it captures every cost and every offsetting gain.

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