Expense Ratio: What It Is and Why It Matters
An expense ratio is the annual fee charged by a fund — such as an index fund or ETF — expressed as a percentage of your total investment. It's deducted automatically from returns and compounds against your wealth over time.
A fund with a 0.05% expense ratio charges $5 per year on a $10,000 investment. A fund with a 1.5% ratio charges $150. That $145/year difference might seem small, but compounded over 30 years on a growing portfolio, it can cost tens of thousands in lost wealth.
The maths in stark terms: Two investors start with $10,000, earning identical 7%/year gross returns for 30 years. Investor A uses a 0.05% fund and ends with ~$74,872. Investor B uses a 1.2% fund and ends with ~$56,917. The fee difference alone costs nearly $18,000.
This is why low-cost passive index funds — from providers like Vanguard, BlackRock (iShares), and Fidelity — have become the default recommendation for long-term wealth building.
What to look for: below 0.20% is excellent for a broad market fund. Between 0.20-0.50% is reasonable for specialised funds. Above 0.75-1%+ warrants careful scrutiny — the fund needs meaningfully better returns to justify the cost, and most don't.
Over a lifetime of investing, the expense ratio is one of the few variables entirely within your control — and one of the most impactful.
Richify Tip
Richify's AI agents factor expense ratios into investment recommendations, helping you maximise the portion of every return that stays in your pocket.
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