What Is Considered a Good Net Expense Ratio?

The net expense ratio is an annual fee charged by mutual funds and exchange-traded funds (ETFs) to cover their operating and administrative costs. This figure is shown as a percentage of a fund’s average net assets and is deducted automatically from an investor’s holdings. Although investors do not receive a direct bill for these expenses, the ratio directly impacts overall returns, as even small differences in fees can affect long-term growth.

The Components of an Expense Ratio

An expense ratio is comprised of several costs for a fund’s daily operations. The largest is the management fee, which compensates portfolio managers for selecting securities and managing the fund’s strategy. These fees are higher for actively managed funds, which involve extensive research and more frequent trading.

Another component is administrative costs, which cover non-investment activities like record-keeping, accounting services, legal oversight, and shareholder communications. These operational costs are incurred by all funds to ensure proper governance and service to investors.

Many funds also include 12b-1 fees in their expense ratios, named after a U.S. Securities and Exchange Commission (SEC) rule. These fees pay for marketing and distribution, including advertising and compensating brokers who sell the fund’s shares. The Financial Industry Regulatory Authority (FINRA) caps these fees at 0.75% of a fund’s average net assets annually.

Distinguishing Net vs Gross Expense Ratios

Investors will encounter both a gross and a net expense ratio. The gross expense ratio is the total annual operating cost of a fund before any discounts or reimbursements are applied.

The net expense ratio is what an investor actually pays after the fund company applies any fee waivers or expense reimbursements. Fund companies use these temporary discounts to attract investors or keep costs competitive, which lowers the fee for a specified period.

These waivers are not always permanent, and the fund’s prospectus details the terms, including the expiration date. Once a waiver expires, the expense ratio could revert to the higher gross figure, increasing the cost of the investment.

Expense Ratio Benchmarks by Fund Category

What is considered a good net expense ratio depends on the fund type. Passively managed index funds and ETFs, which track a market benchmark like the S&P 500, have the lowest costs. Their expense ratios are often between 0.05% and 0.30% because they do not require extensive research or active trading.

Actively managed stock funds have higher costs. For U.S. stock funds, a net expense ratio between 0.5% and 0.75% is competitive, while anything over 1.5% is high. Funds focused on specialized areas like international or small-company stocks may have ratios under 1.25% to account for additional research.

Bond funds also have varying expense ratios based on their management style. Passively managed bond ETFs have expense ratios below 0.2%, while their mutual fund counterparts are under 0.4%. Actively managed bond funds have higher fees to reflect credit analysis costs, while specialty or thematic funds carry the highest expense ratios, sometimes exceeding 2%.

How to Find a Fund’s Expense Ratio

The most reliable source for a fund’s expense ratio is its prospectus, a legal document provided to all potential investors. The summary prospectus contains a standardized “Fees and Expenses” table listing both gross and net ratios. This table also includes footnotes explaining the terms of any fee waivers that result in a lower net expense ratio.

The net expense ratio is also displayed on major financial data websites like Morningstar or Yahoo Finance. When looking up a fund’s ticker symbol, the expense ratio is listed on the main summary or profile page. This provides a quick way to compare the costs of different funds without reviewing the full prospectus.