The expense ratio, also called the total expense ratio (TER), is what a fund charges each year to run itself, shown as a percentage of the money in the fund. A TER of 0.20% means $20 a year for every $10,000 invested. You never receive a bill: the cost is taken out of the fund's assets bit by bit, so it quietly lowers the fund's price and return. In Europe the key information document often calls the figure ongoing charges, which is usually close to the TER but not always identical. The expense ratio does not include what you pay your broker to buy or sell, the gap between buying and selling prices, taxes, or the trading costs the fund itself runs up when it buys and sells holdings.
Worked example
Fund A and Fund B both earn 7% a year before costs. Fund A has an expense ratio of 0.20% and Fund B has 1.20%. You put $10,000 into each and add nothing more. In the first year the cost is 0.20% × $10,000 = $20 for Fund A and 1.20% × $10,000 = $120 for Fund B. For simplicity, take the costs straight off the return: Fund A grows 6.8% a year and Fund B grows 5.8% a year. After 20 years, Fund A is worth $10,000 × 1.068^20 = about $37,276 and Fund B is worth $10,000 × 1.058^20 = about $30,883. The one-point gap in cost leaves a difference of about $6,393, even though neither fund ever sent a bill.
Why it matters
The expense ratio is one of the few things about a fund you can read in advance and compare. Returns are uncertain, but the cost is stated, it repeats every year and it compounds, because money paid out in costs stops earning anything. That is why a small-looking percentage matters over decades. Still, the TER is not the whole bill. Add the broker commission, the buy and sell price gap and any tax, and remember that a fund can also lag its index for reasons the TER does not show (the difference is called tracking difference). A higher or lower TER is a question to look into, not a verdict: compare funds that follow the same kind of index, and read the cost figure in the fund's key information document.
Frequently asked questions
It is the yearly cost of running the fund, as a percentage of the money in it. At 0.20% you pay about $20 a year for each $10,000 invested. It is taken from the fund's assets automatically, so you never get a separate bill.
They are close and often equal, but not always identical. TER is the ratio of total running costs to average fund assets reported by the fund. Ongoing charges is the name used in the European key information document. Check the figure in the fund's own documents.
No. It leaves out your broker's commission, the gap between buying and selling prices, taxes, and the trading costs the fund incurs inside its portfolio. Add those to get a fuller picture of what holding the fund really costs.
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Built & maintained by Worthmap · Last updated November 1, 2026
Educational use only. This tool provides estimates for informational purposes and does not constitute financial, investment, tax, or legal advice. Results are based on inputs you provide and mathematical models, they do not guarantee future performance. Always consult a qualified financial adviser before making investment decisions.