The annual cost of owning a fund, expressed as a percentage of your investment. This fee covers the fund's operating expenses, including management, administration, and marketing. The expense ratio is automatically deducted from the fund's returns each year, so you pay it indirectly through slightly lower returns.
An index fund has an expense ratio of 0.10 percent per year. If you have $10,000 invested in this fund, you pay approximately $10 per year in fees, whether the fund gains or loses money. A different actively managed fund might charge 1.00 percent, meaning you'd pay about $100 per year on that same $10,000.
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