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Expense Ratio
Definition
The annual fee charged by a mutual fund or ETF as a percentage of assets.
Explanation
Expense ratios cover management, administration, and marketing. Index funds: 0.03-0.10%. Active funds: 0.50-2.00%. Deducted from returns automatically. A 1% higher ratio can reduce your final portfolio by 25-30% over 30 years.
The expense ratio is the best predictor of future relative fund performance — lower costs leave more for investors.
Example
$100,000 growing at 7% for 30 years: 0.05% expense ratio = $741,000. 1.0% = $574,000. Difference: $167,000.