If you're interested in investing in exchange-traded funds (ETFs), you have probably heard something about expense ratios. If you want to learn more about ETF expense ratios, then you're in the right place.
An ETF's expense ratio indicates how much of your investment in a fund will be deducted annually as fees. A fund's expense ratio equals the fund's operating expenses divided by the average assets of the fund.
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Typical ETF expense ratios are less than 1%. That means that, for every $1,000 you invest, you pay less than $10 a year in expenses.
How it works
How the ETF expense ratio works
Let's say you invest $100,000 in the Horizon Kinetics Inflation Beneficiaries ETF (INFL 0.76%), which, according to the fund's fact sheet, has a current expense ratio of 0.85%. You will pay $850 to the fund's manager this year and increasing amounts in following years, assuming the value of your investment continues to grow. If the fund's value increases by 10% annually for the next 10 years, then your initial investment will be worth $259,374. Over the 10 years, you would pay fees totaling $19,360.
Over time, an ETF's expense ratio can significantly impact your investment returns. An annual fee of 1% or less may not seem like much, but, as the example illustrates, it becomes increasingly impactful over time. Every dollar that comes out of your account in fees is a dollar whose value is not compounded for all future years. Considering some ETFs have expense ratios close to zero, you have attractive options.
As for the logistics, the fee you annually owe to the ETF's manager, as determined by the prevailing expense ratio and value of your shares, is automatically deducted from your investment account.
How to find it
How to find the best ETF expense ratio
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. Also, ETFs tend to be passively managed, which keeps the management fee low.
Because many ETFs have low expense ratios, only investing in those with very attractive expense ratios doesn't limit your investment options by much. Once you exclude any ETFs that are actively managed, you can consider what kind interests you and diversify your fund selections among many different sectors, company sizes, and indexes.
Definition Icon
Expense Ratio
A percentage of mutual fund or ETF assets deducted annually to cover management, operational, and administrative costs.
Use an ETF screener
With so many ETFs available in the market, you can find those with the best expense ratios in categories that interest you by using an ETF screener. A simple web search produces several options, and brokerages can also screen the market for you based on your preferences.
Let's say you want to invest in a dividend-focused ETF with a low expense ratio. Using an ETF screener tool, you can search for ETFs with dividend yields greater than, say, 2%. Your search returns 40 results, with expense ratios ranging from 0.16% to 3.90%.
You may be tempted to simply choose the fund with the lowest expense ratio, but a better approach is to conduct further research. (However, you can safely exclude from consideration the fund with the 3.90% expense ratio.)
An ETF can have a low expense ratio but not be right for you, based on one or several factors. By reading an ETF's fact sheet or its prospectus, you can verify that the fund in practice follows a strategy that appeals to you. Funds can be included in search results by mistake, may use more leverage than you like, or may be not appealing in some other way.
Reading a fund's prospectus can also tell you whether its advertised expense ratio is artificially low. Many funds offer fee rebates during their first few years to attract investors, but those rebates expire, and long-term investors are faced with permanently higher fees.
Also check that the range of expense ratios associated with the type of ETF that interests you is competitive. For dividend-focused ETFs, the lowest available expense ratio is 0.16%, while other types of ETFs have expense ratios that are even lower. If a low ETF expense ratio is important to you, you can prioritize investment options such as index funds.
How to Invest in ETFs for BeginnersExchange-traded funds let an investor buy lots of stocks and bonds at once.
Best Long-Term ETFs to Invest InThese exchange-traded funds are great to buy and hold.
ETF vs. Index Fund: What Are the Differences?Your investment style can dictate which kind of fund is best for your portfolio.
ETF vs. Mutual Fund: What's the Difference?Which kind of fund is right for you? We take an in-depth look.
What's a good ETF expense ratio?
What's a good ETF expense ratio?
According to Morningstar, the weighted average expense ratio for ETFs in 2019 was 0.45%. That's just over half of what it was in 1999, and the downward trend is expected to continue.
What constitutes a good expense ratio for an ETF is a matter of judgment. What's clear is that investors are not obligated to pay high fees to invest in ETFs, and they should prioritize investing only in those ETFs with competitive and stable expense ratios.
Mike Price has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
FAQs
An ETF's expense ratio indicates how much of your investment in a fund will be deducted annually as fees. A fund's expense ratio equals the fund's operating expenses divided by the average assets of the fund. Typical ETF expense ratios are less than 1%.
What is considered a good expense ratio for ETFs? ›
What Is a Good Expense Ratio? A good expense ratio for an ETF or mutual fund is generally one that is below average. Trends in fund fees reveal that expense ratios have fallen substantially in the past 25 years. For example, Equity ETFs averaged 0.16% in 2021, down from 0.34% in 2009.
What is the expense ratio for Motley Fool? ›
Our passive ETFs (TMFC, TMFX, TMFE) have a gross annual expense ratio of 0.50%. For example, for every $1,000 you invest, you only pay $5 in fees. Our active ETFs (TMFG, TMFS, TMFM) have a gross annual expense ratio of 0.85%. For example, for every $1,000 you invest, you only pay $8.50 in fees.
Is 0.35 expense ratio good? ›
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 is the best performing ETF with lowest expense ratio? ›
100 Lowest Expense Ratio ETFs – Cheapest ETFs
| Symbol | Name | Expense Ratio |
|---|
| SPLG | SPDR Portfolio S&P 500 ETF | 0.02% |
| BBUS | JPMorgan BetaBuilders U.S. Equity ETF | 0.02% |
| BND | Vanguard Total Bond Market ETF | 0.03% |
| AGG | iShares Core U.S. Aggregate Bond ETF | 0.03% |
96 more rowsIn 2022, the asset-weighted average expense ratio of all U.S. open-end mutual funds and ETFs was 0.37% compared with 0.91% in 2002. The line that separates the cheapest 10% of funds from the rest has fallen 45% over the past 15 years, while the line between the most expensive 10% and the rest has come down 17%.
What is the expense ratio of healthy ETF? ›
Aditya Birla Sun Life Nifty Healthcare ETF-Growth Fund Details
| Fund House | Aditya Birla Sun Life Mutual Fund |
|---|
| Expense Ratio | 0.22%(1.54% Category average) |
| Fund Size | Rs. 41.38 Cr(0.18% of Investment in Category) |
| Type | Open-ended |
| Risk Grade | - |
6 more rowsWe recommend investors buy 25 stocks and hold them for at least 5 years. The Epic Bundle grants members immediate access to our foundational stock-recommendation services: Stock Advisor, Rule Breakers, and Everlasting Stocks. Calculated by average return of all stock recommendations since inception of the service.
How reliable is the Motley Fool? ›
Yes, Motley Fool stock picks can generally be trusted. Their 20+ year track record shows market-beating returns driven by adept stock selection. But as with any service, not every pick is guaranteed to be a winner.
What are Motley Fool rule breakers? ›
Motley Fool Rule Breakers is a stock picking service that is tailored for users looking for high-growth stocks in high growth industries. This is The Motley Fool's 2nd newsletter.
*Vanguard average mutual fund expense ratio: 0.09%. Industry average mutual fund expense ratio: 0.50%. All averages are asset-weighted. Industry average excludes Vanguard.
What is the expense ratio of VOO? ›
The VOO ETF has annual operating expenses of 0.03%.
What is a reasonable ETF expense ratio? ›
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. Also, ETFs tend to be passively managed, which keeps the management fee low.
What is the best ETF to buy right now? ›
The best ETFs to buy now
| Exchange-traded fund (ticker) | Assets under management | Expenses |
|---|
| Vanguard 500 Index ETF (VOO) | $432.2 billion | 0.03% |
| Vanguard Dividend Appreciation ETF (VIG) | $76.5 billion | 0.06% |
| Vanguard U.S. Quality Factor ETF (VFQY) | $333.3 million | 0.13% |
| SPDR Gold MiniShares (GLDM) | $7.4 billion | 0.10% |
1 more rowIn May 2024, the top-performing stock ETFs included large-blend fund Direxion HCM Tactical Enhanced US Equity Strategy ETF HCMT and large-growth fund HCM Defender 100 Index ETF QQH. Data in this article is sourced from Morningstar Direct.
What is the average expense ratio for Vanguard ETF? ›
***Vanguard average ETF expense ratio: 0.05%. Industry average ETF expense ratio: 0.25%. All averages are asset-weighted.
What is the expense ratio of the S&P 500 ETF? ›
Its expense ratio is 0.2%. Still, it's an inexpensive way to increase exposure to the other 497 companies in the S&P 500 that aren't Microsoft, Nvidia, or Apple. And despite buying and selling stocks every quarter, the fund has never distributed any capital gains to shareholders.
How to tell if an ETF is overvalued? ›
To determine if an ETF is overvalued, an investor can analyze the historical trend of the ETF's price and volume. If the price has risen rapidly in a short period and the volume is decreasing, it could indicate that the ETF is overvalued.
What is the average expense ratio for an active ETF? ›
The Average ETF Expense Ratio Is Lower Than Mutual Funds
The average expense ratio for index ETFs is typically lower than that of index mutual funds, historically 0.57% for ETFs versus 0.84% for mutual funds. Importantly, the higher costs of mutual funds can add up and impact portfolio returns over the long run.
