What Is a Good Expense Ratio for an ETF?

The average ETF expense ratio indicates the annual cost associated with managing and operating an ETF. This metric is expressed as a percentage of the fund’s average assets and can vary significantly based on the type and complexity of the ETF. Comparing the ETF’s expense ratio to this average can help investors choose cost-effective investments.

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What Is an Expense Ratio?

An expense ratio is a measure that represents the annual fees a fund charges its investors. These fees are taken as a percentage of the fund’s average assets under management (AUM) and cover various costs associated with managing the fund. The expense ratio is deducted directly from the fund's assets, impacting the overall return for investors.

The expense ratio directly affects the net returns of an investment. For example, if a fund has an expense ratio of 1%, this means that for every $1,000 of the fund’s total assets, $10 will be used to cover annual expenses.

Expense ratios can vary significantly among different types of funds. Actively managed mutual funds often have higher expense ratios due to the intensive research and analysis involved, whereas passively managed funds that track an index, like ETFs, typically have lower expense ratios.

Components of an ETF Expense Ratio?

An ETF expense ratio involves several key elements that represent the annual fees charged to investors. Here are five main components:

• Management fees: These are fees paid to the fund manager or investment advisory firm for managing the ETF. This covers the cost of portfolio management and other related services.
• Administrative fees: These fees cover the operational costs of running the ETF. This includes accounting, legal, compliance and record-keeping expenses.
• Marketing and distribution fees: Also known as 12b-1 fees , these costs are associated with the promotion and sale of the ETF. Not all ETFs charge these fees, but they can be a part of the expense ratio for some funds.
• Custodial fees: These are fees for the safekeeping of the ETF's securities. Custodial fees are paid to the bank or financial institution that holds the ETF's assets.
• Other expenses: This category includes various miscellaneous costs that may arise, such as transfer agent fees, securities lending fees and any other operational expenses not covered by the other categories.

What Is the Average ETF Expense Ratio?

As of 2023, the average ETF expense ratio was 0.15% for index equity ETFs and  0.11% for index bond ETFs according to a research report from the Investment Company Institute . The average expense ratio for mutual funds was 0.42% for equity mutual funds and 0.37% for bond mutual funds. These figures represent the percentage of an ETF’s assets that are used to cover administrative and other operating costs annually.

Expense ratios can vary significantly depending on the type of ETF. For example, passively managed ETFs, which track an index like the S&P 500, often have lower expense ratios than actively managed ETFs, which rely on professional managers to make investment decisions.

One of the reasons for the lower expense ratios in ETFs when compared with mutual funds is their structure. ETFs generally have fewer operational costs due to their passive management style and the fact that they are traded on exchanges, similar to stocks. This cost efficiency is one of the main attractions for investors seeking to minimize fees.

Investors should note that while a lower expense ratio can save money over the long term, they should also consider the ETF’s overall performance, the quality of its management and how well it aligns with their investment goals.

How to Find an ETF's Expense Ratio

Finding an ETF’s expense ratio is straightforward with a few key resources. Start by checking the ETF’s prospectus , which is a document provided by the fund that details its objectives, strategies and fees. This document is often available on the ETF provider's website under a section like "Investor Relations" or "Fund Documents."

Many financial news and analysis websites also track ETF expense ratios. By entering the ETF’s ticker symbol into the search bar, you can access comprehensive fund details, including the expense ratio. These platforms often present the information in an easy-to-read format, along with other relevant data like performance and holdings.

Lastly, brokerage platforms offer detailed insights into ETFs, including expense ratios. If you have an account with a brokerage firm like Vanguard or Fidelity , simply search for the ETF within their system. This method is particularly convenient for investors who are comparing multiple ETFs, as it allows for side-by-side comparisons of expense ratios and other metrics.

Bottom Line

The average ETF expense ratio represents the annual fees deducted from the fund’s assets to cover management, administrative and other operational costs. This metric can vary widely depending on the type of ETF, with passively managed funds typically having lower expense ratios when compared with actively managed ones. By using resources like a fund prospectuses, financial analysis websites and brokerage platforms, investors can easily access and compare expense ratios.

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