Expense Ratio

The expense ratio is the annual cost that reduces your fund's return. Discover why index funds win the fee battle. Analyse your portfolio with Index Balance.

Definition

The expense ratio is the annual percentage of a fund's assets that goes toward covering its management and operating costs. It is automatically deducted from the fund's net asset value each day, so the investor does not pay it explicitly but does feel its drag on returns. A fund with a 1.5% expense ratio needs to generate an extra 1.5% just to break even with an identical zero-cost fund.

For index fund investors, the expense ratio is one of the most important factors in fund selection. Index funds stand out precisely for their low fees: the best MSCI World ETFs carry ratios of between 0.07% and 0.20% per year, compared to the 1.5%–2% typical of actively managed funds. Over 30 years, this difference can mean hundreds of thousands of euros on a medium-sized portfolio.

Index Balance lets you record the TER of each fund in your portfolio and see its cumulative impact on net returns. Try it free at indexbalance.com.

Practical example

You invest €50,000 for 30 years with a gross annual return of 8%. With an expense ratio of 0.10% (index fund), the final value would be €490,000. With a ratio of 1.50% (typical active fund), it would be €318,000. The €172,000 difference is the real long-term cost of fees. Index Balance calculates this automatically every time you update your portfolio.