An expense ratio is the share of a fund's average net assets used each year to pay its operating costs, according to the Securities and Exchange Commission's investor bulletin on fund fees. It is taken out of the fund itself rather than billed to you, so it never shows up as a line item on your statement — and it is charged whether the fund gains or loses.
What does the expense ratio actually pay for?
It pays the fund's annual operating expenses. The SEC's investor bulletin on mutual fund and ETF fees, published July 23, 2025, lists three parts: management fees paid to the fund's investment adviser, 12b-1 fees, and "other expenses" such as legal, accounting and custodial costs.
12b-1 fees are distribution costs — the bulletin describes them as covering marketing, broker compensation, advertising, and printing and mailing prospectuses. They are paid out of fund assets, which is another way of saying shareholders pay them.
Add those three pieces together, divide by the fund's average net assets, and you get the expense ratio. The SEC describes it as annual operating expenses expressed as a percentage of average net assets. Nothing leaves your checking account. The fund's own assets cover the bill, which is exactly why the cost is easy to miss.
One thing the expense ratio does not include: sales charges. Front-end and back-end sales loads, redemption fees, exchange fees, purchase fees and account fees are listed separately as shareholder fees in that same bulletin. A fund can carry a modest expense ratio and still charge a load on top.
How much is it costing you in dollars?
Multiply your balance by the percentage. Morningstar's 2026 US Fund Fee Study, published May 2026, reports an asset-weighted average fee of 0.32% across US mutual funds and ETFs for 2025 and an equal-weighted average of 0.92%. On a $10,000 balance, that is $32 a year and $92 a year.
The two averages differ because they count different things. The asset-weighted figure weights each fund by the money in it, so it reflects where investors' dollars actually sit. The equal-weighted figure counts every fund the same, expensive or cheap, large or tiny.
The practical takeaway is that the fund you happen to hold may look nothing like either average. The only number that matters for your account is the one in your own fund's prospectus.
Why does a fraction of a percent matter over 20 years?
Because the fee is charged every year, and you also give up whatever that money would have earned. The SEC bulletin How Fees and Expenses Affect Your Investment Portfolio, published February 2014, states it directly: "not only is your investment balance reduced by the fee, but you also lose any return you would have earned on that fee."
That bulletin uses a $100,000 portfolio held for 20 years at a 4% annual return, comparing annual fees of 0.25%, 0.50% and 1.00%. Here is that comparison worked out, using those same figures, with the fee subtracted from the 4% return each year, no additional contributions, and no taxes or trading costs included.
| Annual fee | Return after the fee | Value after 20 years |
|---|---|---|
| 0.25% | 3.75% | $208,815 |
| 0.50% | 3.50% | $198,979 |
| 1.00% | 3.00% | $180,611 |
The gap between the 0.25% fund and the 1.00% fund comes to $28,204 — more than a quarter of the original $100,000, produced by three-quarters of a percentage point a year.
A steady 4% return is an assumption borrowed from the SEC's illustration, not a forecast. Real returns move around and can be negative, and a losing year still carries the fee.
What counts as a normal expense ratio right now?
Fees have been drifting down. Morningstar's 2026 study reports the asset-weighted average ticking down to 0.32% in 2025 from 0.34% in 2024, and the equal-weighted average falling to 0.92% from 0.94%. Both figures are as of that May 2026 report and are subject to change.
Money is moving in the same direction. Morningstar found the cheapest 20% of funds took in $694 billion during 2025, while the other 80% saw $244 billion flow out.
None of that tells you what belongs in your account. It tells you what the going rate looks like, so you can recognize an outlier when you see one.
Does a low-cost label make an index fund cheap?
Not on its own. The SEC's Investor Bulletin on index funds, published August 6, 2018, says that although passive management usually reduces costs, "not all index funds have lower costs than actively managed funds," and it tells investors to check the actual fee before buying.
Two funds tracking the same well-known index can charge different amounts. The bulletin also notes that a fund holding only a sample of an index's securities, rather than all of them, is less likely to match the index's performance closely.
That bulletin covers traditional funds tracking established indexes such as the S&P 500, the Russell 2000 and the Wilshire 5000. It explicitly does not cover newer funds built on custom indexes, which it says need separate evaluation.
How do you check the number before you buy?
The expense ratio is disclosed, not hidden — it just lives in a document most people never open. The SEC says the figure appears in the fund's prospectus fee table. Four steps get you to it and to the charges sitting next to it.
- Open the fund's prospectus and find the fee table. The annual fund operating expenses section shows management fees, 12b-1 fees, other expenses, and the total expense ratio.
- Read the shareholder fees section directly above it. That is where sales loads, redemption fees, exchange fees, purchase fees and account fees appear, if the fund charges any.
- Check the account fee footnotes. The SEC's fee bulletin notes that accounts valued below $10,000 may be charged a maintenance fee at some funds.
- Compare funds in the same category on those disclosed numbers. The SEC's fee bulletin recommends FINRA's Fund Analyzer for comparing the cost of mutual funds and ETFs, and suggests asking how a product's fees and expenses compare with others that meet the same objective.
If you already own funds, the same table exists for each one. Reading three prospectus fee tables is a slow afternoon, not a career change.
This is information, not financial advice. What any of it means for you depends on your own situation, and every rate and fee above comes from the named source on the date given and can change — check the current prospectus before acting on anything here.
For a related credit perspective, read How a credit freeze works, and how it differs from a fraud alert.
For more context, read What an Expense Ratio Really Costs Over Thirty Years.
