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.
What makes a good ER for a fund? For domestic stock funds in the US, an ER below 0.1% is great, below 0.25% is good, below 0.5% is fair, and below 1% is sometimes the best you can manage in an expensive plan.
The expense ratio is measured as a percent of your investment in the fund. For example, a fund may charge 0.30 percent. That means you'll pay $30 per year for every $10,000 you have invested in that fund. You'll pay this on an annual basis if you own the fund for the year.
Expense ratios vary depending on the type of fund, but benchmarks help identify whether a ratio is reasonable: Index funds. Generally considered cost-efficient if the expense ratio is below 0.2%, with some options as low as 0.03%.
So, if a scheme charges 0.2% as expense ratio, what it essentially means is that 0.2% of AUM will be used to cover operating and administrative expenses of the funds.
What is a good expense ratio? Typically, ETFs have lower expense ratios than mutual funds. Generally, low-cost equity ETFs will have a net expense ratio of no more than 0.25%. Low-cost equity mutual funds will have expense ratios of 0.5% or lower.
For example, if you invest $10,000 in an ETF with an expense ratio of 0.04%, you'll pay $4 to the fund's manager this year. As the value of your investment grows, the amount you pay will also grow — which is why a fund's expense ratio can significantly impact your returns over time.
SPY is more expensive with a Total Expense Ratio (TER) of 0.0945%, versus 0.03% for VOO. SPY is up 28.31% year-to-date (YTD) with +$7.13B in YTD flows. VOO performs better with 28.36% YTD performance, and +$103.99B in YTD flows.
Fund B has an expense ratio of 0.75%. Again, this tells us that it is likely an actively managed fund and that we pay $75 for every $10,000 we invest. While that doesn't sound like a lot, it can add up over the course of 30 years, or once you have hundreds of thousands of dollars invested.
Low expense ratio: VOO has an expense ratio of 0.03%, one of the lowest among S&P 500 ETFs. This is cost-effective as the value of the investment grows over time.
Investors generally look for a 'good' expense ratio when selecting MFs. Good expense ratios can vary depending on whether the fund is actively or passively managed. Typically, expense ratios between 0.5% and 0.75% are considered 'good' for actively managed funds. Ratios above 1.5% are considered high.
What is the expense ratio formula? In real life, that means if the fund spends $100,000 a year on operating costs and has $10 million in assets, its expense ratio would be 0.01, or 1%. Sometimes expense ratios are expressed as basis points, or bps.
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.
For a typical 401(k) plan, the expense ratio should be no higher than 2% and more likely in the 1.0% to 1.5% range. The lower the expense ratio the better, with higher fees eating into profits.
Berkshire Hathaway owns two exchange-traded funds (ETF), The SPDR S&P 500 ETF Trust (NYSEMKT: SPY) and the Vanguard S&P 500 ETF (NYSEMKT: VOO). Both of these ETFs track the S&P 500.
For example, you might buy SPY if you want to trade actively, or even venture into day trading, because of its high volume. You might consider buying VOO to hold over the long term because of its lower expenses.
Invesco S&P 500 Momentum ETF (SPMO)
SPMO holds $4 billion in total assets and has consistently outperformed the S&P 500. Over the past five years, SPMO has an annualized total return of 19.1%, compared with the S&P 500's 12.3%. Low commission rates start at $0 for U.S. listed stocks & ETFs*.
An expense ratio of 0.2%, for example, means that for every $1,000 you invest in a fund, you'll be paying $2 annually in operating expenses. These funds are taken out of your expenses over time, so you won't be able to avoid paying them.
Invesco QQQ's total expense ratio is 0.20%. Investment returns and principal value will fluctuate, and shares, when redeemed, may be worth more or less than their original cost. Current performance may be higher or lower than performance quoted.
Vanguard's low fees can help you save * $28,574
As of December 31, 2023, Vanguard's average mutual fund and ETF expense ratio is 0.08%. Industry average mutual fund and ETF expense ratio: 0.44%. All averages are asset-weighted. Industry averages exclude Vanguard.
SPY has an expense ratio of 0.09%, which, while low, is still higher than that of VOO,'s 0.03%, one of the lowest expense ratios for S&P 500 ETFs. This makes VOO more cost-effective for long-term investors, as expense ratio differences compound over time and impact returns.
ETF fee example
Each day, approximately 1 cent would be accrued ($4/365 days), and then deducted on a monthly basis, so after 12 months your investment would be worth around $9,996 (assuming no change in the market value of the fund holdings).