# What is a good expense ratio?

> For a broad index fund, under 0.10% a year is good. Question anything above 0.50% for a plain stock or bond fund.

Source: https://www.walletprep.com/learn/expense-ratios/ · Updated 2026-10-04 · Investing

For a broad index fund, a good expense ratio is low: many charge under 0.10% a year, or under $10 for every $10,000 you hold. Above about 0.50% for a plain stock or bond fund is worth questioning, because a fee comes out every year whether the fund gains or loses.

## Key facts
- **It is a yearly percentage of your balance.** The expense ratio is the share of a fund's assets used each year to pay its running costs, such as management, marketing and record keeping. Your cost in dollars is your balance times the ratio.
- **Low means under 0.10% for broad index funds.** Broad index funds that track the whole US market, the whole world or a broad bond index often charge under 0.10%. Actively managed funds, where managers pick investments, commonly charge several times more.
- **Small gaps grow large over decades.** Money paid in fees can't compound for you. A fund with higher costs has to earn more just to match a cheaper fund doing the same thing.
- **It is not the only fee.** Some funds also charge sales loads or redemption fees, and some accounts add yearly account or adviser fees. Add them all up to see what investing really costs you.

## What the expense ratio pays for
Every fund has running costs: the managers, the trading, the record keeping, the lawyers and accountants, and sometimes marketing. The fund passes those costs to its owners as a yearly percentage of assets. That percentage is the expense ratio.
It is taken out of the fund a little at a time, so the price you see already reflects it. That is why it is easy to miss. You will never see a line on a statement that says "fee: $340", but the money is gone all the same.

## What counts as low or high
There is no official cutoff, but these ranges are a useful guide. For a broad US stock, international stock or bond index fund, under 0.10% is low, and some charge 0.05% or less. From 0.10% to 0.50% is middling for an index fund. Above 0.50% for a plain stock or bond fund is high and worth questioning.
Some funds cost more for a reason. A target-date fund bundles several funds and rebalances for you, so it may charge a bit more than a single index fund, often still well under 0.50% for index-based versions. Actively managed funds often charge 0.50% to 1% or more. A higher fee only pays off if the fund beats its cheaper rival by more than the fee, year after year, and that is hard to know in advance.

## How to turn a percentage into dollars
Multiply your balance by the ratio. Move the decimal point two places to the left first: 0.85% is 0.0085. On $40,000, that is $40,000 × 0.0085 = $340 a year. At 0.04%, it is $40,000 × 0.0004 = $16.
As your balance grows, the dollar fee grows with it. A 1% fee on $200,000 is $2,000 every year. That is why a gap that looks small on a $5,000 balance is worth fixing early.

## Where to find a fund's expense ratio
Look in the fund's prospectus, in the fee table near the front, or on its one-page fact sheet. For a 401(k), the plan website usually lists each fund's expense ratio, often in a fee disclosure chart.
You may see two figures. The gross expense ratio is the full cost. The net expense ratio is what you pay after any fee waiver the fund company has agreed to. Waivers can end, so note both. A fund that holds other funds may also list acquired fund fees, which are already included in the total.

## What to do if your fees are high
In an IRA or brokerage account, you can usually sell a high-cost fund and buy a low-cost index fund. Inside an IRA or 401(k), that switch has no tax cost. In a regular taxable account, selling at a gain can mean capital gains tax, so you may prefer to send new money to the cheaper fund instead.
In a 401(k), you choose from the plan's menu. Scan it for funds with index in the name and compare their expense ratios. If every option is expensive, still take any employer match, which is worth far more than the fee costs, and consider an IRA for extra savings.

## A worked example: 0.85% vs 0.04% on $40,000
Marco, 40, has $40,000 in an old 401(k) fund charging 0.85%. He could move it to an index fund charging 0.04%. He leaves it alone for 25 years. Assume 7% a year before fees.

- Yearly fee at 0.85%: $340
- Yearly fee at 0.04%: −$16
- Extra cost in year one: = $324
- After 25 years at 0.04%: $226,751
- After 25 years at 0.85%: −$185,388
- What the higher fee costs: = $41,363

1. Year one fees: $40,000 × 0.85% = $340, and $40,000 × 0.04% = $16. The gap is $340 − $16 = $324.
2. After fees, the return is 7% − 0.04% = 6.96% versus 7% − 0.85% = 6.15%. Grown monthly for 25 years, $40,000 becomes $226,751 versus $185,388.
3. $226,751 − $185,388 = $41,363. Real returns vary and can be negative, but the fee gap applies every single year.

### What $40,000 grows to in 25 years at 7% before fees, minus a fee of 0%, 0.25%, 0.5%, 0.75% or 1%

| Annual return | Balance after 25 years | Of which growth |
| --- | --- | --- |
| 7% | $229,017 | $189,017 |
| 6.8% | $215,218 | $175,218 |
| 6.5% | $202,248 | $162,248 |
| 6.3% | $190,057 | $150,057 |
| 6% | $178,599 | $138,599 |

## Common mistakes
- **Judging a fund by last year's return.** A great year can hide a high fee, and past returns don't predict future ones. The fee is known in advance. The return isn't. Compare costs first.
- **Ignoring fees on small balances.** On $3,000, a 1% fee is only $30, so it feels harmless. But the habit sticks as the balance grows, and fixing it early costs nothing.
- **Forgetting the adviser fee.** An adviser who charges 1% of assets a year adds that on top of the funds' expense ratios. Add both to see your total yearly cost.

## Questions people ask
### Is a 1% expense ratio high?
For a broad index fund, yes. It is many times what low-cost index funds charge. For an actively managed or specialty fund it is common, but the fund has to beat cheaper options by more than 1% a year to be worth it.

### Is the expense ratio charged every year?
Yes. It is an annual rate taken out a little each day from the fund's assets, so you pay it for every day you own the fund, in rising and falling markets.

### Do ETFs or mutual funds have lower expense ratios?
It depends on the fund. ETFs have tended to cost less to run, but many index mutual funds are just as cheap. Compare the two specific funds you are choosing between.

### Is a 0.2% expense ratio good?
It is reasonable for a target-date fund or an international or specialty index fund. For a plain US stock market index fund, you can often find lower. On $10,000, 0.2% is $20 a year.

## Do this today
Log in to your 401(k) or IRA and write down each fund you own, its balance and its expense ratio. Multiply each balance by its ratio and add them up. That total is what you pay in fund fees each year.

## Sources
- [Investor.gov (SEC): Expense Ratio](https://www.investor.gov/introduction-investing/investing-basics/glossary/expense-ratio)
- [Investor.gov (SEC): Understanding Fees](https://www.investor.gov/introduction-investing/getting-started/understanding-fees)
- [Investor.gov (SEC): Mutual Fund and ETF Fees and Expenses](https://www.investor.gov/introduction-investing/investing-basics/glossary/mutual-fund-fees-and-expenses)
- [FINRA: Fund Analyzer](https://tools.finra.org/fund_analyzer/)

_General education, not personalized financial, tax or legal advice. Figures are examples. Check current rates and limits before you act._