An expense ratio, in financial terms, refers to the percentage of a mutual fund or an Exchange-Traded Fund’s (ETF) assets that are used to cover the fund’s operating expenses. These operating expenses include various costs associated with managing and administering the fund, such as management fees, administrative fees, custodian fees, marketing expenses, and other operational costs.
The expense ratio is expressed as a percentage and is calculated by dividing the total expenses of the fund by its average assets under management (AUM) over a specific period, usually a year. This ratio is important for investors because it reflects the proportion of their investment that goes towards covering the fund’s ongoing costs.
A lower expense ratio is generally preferred by investors, as it means a larger portion of their investment is working to generate returns rather than being used to cover expenses. Expense ratios can vary significantly between different funds and investment products, so it’s important for investors to consider this factor when choosing where to invest their money.