What is expense ratio?

The expense ratio is a fee charged by mutual funds and ETF providers for the concept of managing the assets in the fund. We can call it the maintenance fee of the investment. It usually ranges between 0.1 to 1%, but it can go as low as 0.045%, like in the SPY case, and up to 2.95%, like in the case of Global X SuperDividend® Alternatives ETF (NASDAQ: ALTY).

But how does it affect the return on your investment? Well, all ETFs and mutual funds have a yearly historical performance expressed in a percentage (in our expense ratio calculator, it's called: Yearly expected investment return). That is probably the most advertised value because it shows how much money the ETF and fund are expecting to be making in the next years.

However, that's not the money you receive. The actual performance of your investment is the ETF/fund performance minus the expense ratio you will have to pay every year.

Here it is important you remember the effect of the compound interest and the time value of money concept. Both explain how important those fees are. You might think that 0.1% is nothing, but if you add it to the compound interest calculator and simulate its effect through several years, it might become a relevant chunk of your money.

Expense Ratio formula

The calculation has two parts. The first considers an initial investment for which we will use the formula for the money's future value. The second one considers a yearly periodic investment for which we will use the formula for the future value of an annuity.

ER = Total Fund Assets / Total Fund Costs

How to calculate Expense Ratio?

To calculate the expense ratio:

• Find the fund's total operating expenses. This information is usually in the fund's shareholder report.
• Identify the fund's average assets for the year, also found in the report.
• Divide the total operating expenses by the fund's average assets.
• Multiply the result by 100 to get the expense ratio as a percentage.

This ratio shows the percentage of assets used for expenses.

Expense Ratio Example

If a fund's assets are $2,000,000 and the expense ratio is 2%, the fund's total operating expenses would be $40,000. This is calculated by multiplying the fund's assets ($2,000,000) by the expense ratio (2%), which gives you the amount used for expenses.

An expense ratio of 0.5% means that for every $1000 you invest, you will pay $5.
To calculate this simply:

1. Find 0.5% of 1000.
   0.5/100 × 1000 = 5
2. The answer is $5.