If you're interested in investing in exchange-traded funds (ETFs), you have probably heard something about expense ratios. If you want to learn more about ETF expense ratios, then you're in the right place.
An ETF's expense ratio indicates how much of your investment in a fund will be deducted annually as fees. A fund's expense ratio equals the fund's operating expenses divided by the average assets of the fund.
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Typical ETF expense ratios are less than 1%. That means that, for every $1,000 you invest, you pay less than $10 a year in expenses.
How it works
How the ETF expense ratio works
Let's say you invest $100,000 in the Horizon Kinetics Inflation Beneficiaries ETF (INFL 0.49%), which, according to the fund's fact sheet, has a current expense ratio of 0.85%. You will pay $850 to the fund's manager this year and increasing amounts in following years, assuming the value of your investment continues to grow. If the fund's value increases by 10% annually for the next 10 years, then your initial investment will be worth $259,374. Over the 10 years, you would pay fees totaling $19,360.
Over time, an ETF's expense ratio can significantly impact your investment returns. An annual fee of 1% or less may not seem like much, but, as the example illustrates, it becomes increasingly impactful over time. Every dollar that comes out of your account in fees is a dollar whose value is not compounded for all future years. Considering some ETFs have expense ratios close to zero, you have attractive options.
As for the logistics, the fee you annually owe to the ETF's manager, as determined by the prevailing expense ratio and value of your shares, is automatically deducted from your investment account.
How to find it
How to find the best ETF expense ratio
High fees can turn any investment into a poor one. A good rule of thumb is to not invest in any fund with an expense ratio higher than 1% since many ETFs have expense ratios that are much lower. Also, ETFs tend to be passively managed, which keeps the management fee low.
Because many ETFs have low expense ratios, only investing in those with very attractive expense ratios doesn't limit your investment options by much. Once you exclude any ETFs that are actively managed, you can consider what kind interests you and diversify your fund selections among many different sectors, company sizes, and indexes.
Definition Icon
Expense Ratio
A percentage of mutual fund or ETF assets deducted annually to cover management, operational, and administrative costs.
Use an ETF screener
With so many ETFs available in the market, you can find those with the best expense ratios in categories that interest you by using an ETF screener. A simple web search produces several options, and brokerages can also screen the market for you based on your preferences.
Let's say you want to invest in a dividend-focused ETF with a low expense ratio. Using an ETF screener tool, you can search for ETFs with dividend yields greater than, say, 2%. Your search returns 40 results, with expense ratios ranging from 0.16% to 3.90%.
You may be tempted to simply choose the fund with the lowest expense ratio, but a better approach is to conduct further research. (However, you can safely exclude from consideration the fund with the 3.90% expense ratio.)
An ETF can have a low expense ratio but not be right for you, based on one or several factors. By reading an ETF's fact sheet or its prospectus, you can verify that the fund in practice follows a strategy that appeals to you. Funds can be included in search results by mistake, may use more leverage than you like, or may be not appealing in some other way.
Reading a fund's prospectus can also tell you whether its advertised expense ratio is artificially low. Many funds offer fee rebates during their first few years to attract investors, but those rebates expire, and long-term investors are faced with permanently higher fees.
Also check that the range of expense ratios associated with the type of ETF that interests you is competitive. For dividend-focused ETFs, the lowest available expense ratio is 0.16%, while other types of ETFs have expense ratios that are even lower. If a low ETF expense ratio is important to you, you can prioritize investment options such as index funds.
How to Invest in ETFs for BeginnersExchange-traded funds let an investor buy lots of stocks and bonds at once.
Best Long-Term ETFs to Invest InThese exchange-traded funds are great to buy and hold.
ETF vs. Index Fund: What Are the Differences?Your investment style can dictate which kind of fund is best for your portfolio.
ETF vs. Mutual Fund: What's the Difference?Which kind of fund is right for you? We take an in-depth look.
What's a good ETF expense ratio?
What's a good ETF expense ratio?
According to Morningstar, the weighted average expense ratio for ETFs in 2019 was 0.45%. That's just over half of what it was in 1999, and the downward trend is expected to continue.
What constitutes a good expense ratio for an ETF is a matter of judgment. What's clear is that investors are not obligated to pay high fees to invest in ETFs, and they should prioritize investing only in those ETFs with competitive and stable expense ratios.
Mike Price has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
FAQs
High fees can turn any investment into a poor one. A good rule of thumb is to not invest in any fund with an expense ratio higher than 1% since many ETFs have expense ratios that are much lower. Also, ETFs tend to be passively managed, which keeps the management fee low.
What is the expense ratio for Motley Fool? ›
Our passive ETFs (TMFC, TMFX, TMFE) have a gross annual expense ratio of 0.50%. For example, for every $1,000 you invest, you only pay $5 in fees. Our active ETFs (TMFG, TMFS, TMFM) have a gross annual expense ratio of 0.85%. For example, for every $1,000 you invest, you only pay $8.50 in fees.
What is the expense ratio of healthy ETF? ›
Aditya Birla Sun Life Nifty Healthcare ETF-Growth Fund Details
| Fund House | Aditya Birla Sun Life Mutual Fund |
|---|
| Expense Ratio | 0.22%(1.54% Category average) |
| Fund Size | Rs. 36.50 Cr(0.16% of Investment in Category) |
| Type | Open-ended |
| Risk Grade | - |
6 more rowsHigh and Low Ratios
A number of factors determine whether an expense ratio is considered high or low. A good expense ratio, from the investor's viewpoint, is around 0.5% to 0.75% for an actively managed portfolio. An expense ratio greater than 1.5% is considered high.
Is 0.3 expense ratio good? ›
Typically most passive funds have an expense ratio which is lesser than 1 percent, often as low as 0.3%. Most active mutual funds on the other hand have an expense ratio higher than 1 %.
What expense ratio is too high? ›
Typically, any expense ratio higher than one percent is high and should be avoided. Over an investing career, a low expense ratio could easily save you tens of thousands of dollars, if not more. And that's real money for you and your retirement.
What is the expense ratio for ETF? ›
The average expense ratio for index ETFs is typically lower than that of index mutual funds, historically 0.57% for ETFs versus 0.84% for mutual funds. Importantly, the higher costs of mutual funds can add up and impact portfolio returns over the long run.
What is the average ETF expense ratio Vanguard? ›
*Vanguard average ETF expense ratio: 0.06%. Industry average ETF expense ratio: 0.24%.
What is the trend in ETF expense ratio? ›
The average expense ratio for index bond ETFs remained unchanged at 0.11 percent in 2023. short-term interest rates, the average expense ratio for money market funds rose 9 basis points, to 0.22 percent, in 2023. James Duvall, economist, and Alex Johnson, senior research associate, prepared this report.
What is a reasonable fee for ETFs? ›
Also known as ETF transaction fees or ETF transaction costs, these may range from $8 to $30 at brokerage firms. Trading commissions are charged per trade, so they can add up if investors buy and sell a lot—and they're usually more expensive when an order is placed in person or over the phone.
Invesco QQQ's total expense ratio is 0.20%.
What is better than Voo? ›
The primary difference between SPY, VOO, IVV, and SPLG is their cost. SPLG has the lowest cost at 0.02%, followed by VOO and IVV at 0.03%, and SPY at 0.09%. If you are a cost-conscious investor, the VOO, IVV, and SPLG might make a more attractive option compared to SPY with their lower expense ratios.
What is the expense ratio for the spy? ›
Since the SPY ETF is passively managed, the operational expenses to run the fund are extremely low. ETF fees are expressed as an expense ratio, which is a percentage representing a fund's assets used to pay its operating costs. The SPY ETF expense ratio is just 0.09%, which is $9 for every $10,000 invested.
What ETF has the lowest expense ratio? ›
100 Lowest Expense Ratio ETFs – Cheapest ETFs
| Symbol | Name | Expense Ratio |
|---|
| SPLG | SPDR Portfolio S&P 500 ETF | 0.02% |
| BBUS | JPMorgan BetaBuilders U.S. Equity ETF | 0.02% |
| BND | Vanguard Total Bond Market ETF | 0.03% |
| AGG | iShares Core U.S. Aggregate Bond ETF | 0.03% |
96 more rows- S&P 500 ETF with the Lowest Fees: iShares Core S&P 500 ETF (IVV) (Tie)
- S&P 500 ETF with the Lowest Fees: Vanguard S&P 500 ETF (VOO)(Tie)
- S&P 500 ETF with the Lowest Fees: SPDR Portfolio S&P 500 ETF (SPLG) (Tie)
- Most Liquid S&P 500 ETF: SPDR S&P 500 ETF (SPY)
- Why Expense Ratios Matter.
Nowadays, an expenditure ratio greater than 1.5% is usually regarded as excessive. A suitable range for an actively managed portfolio's expense ratio is 0.5% to 0.75%. The percentage for passive or index funds is typically 0.2%, however, it occasionally drops to 0.02% or less.
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Price-to-sales ratio formula
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