Expense ratios: What they are & how they work

You won't find them on your account statement

The cost of investing is usually associated with trading commissions and account service fees—items you see as "debits" from your accounts.

But expense ratios are less obvious because they're not itemized on your account statements or confirmations. Instead, each fund's expenses are deducted from its total value on a regular basis. And those expenses cut directly into your investment returns. 

What an expense ratio is

An expense ratio reflects how much a mutual fund or an ETF (exchange-traded fund) pays for portfolio management, administration, marketing, and distribution, among other expenses.

You'll almost always see it expressed as a percentage of the fund's average net assets (instead of a flat dollar amount).

For example, say the average expense ratio across the entire fund industry was 0.47%. This would equate to $47 for every $10,000 invested. If an expense ratio was .08%, that would only be $8 for every 10,000 invested. These costs can add up, so expense ratios matter!

See the difference low-cost funds can make

How expense ratios are calculated at Vanguard

As each fund passes its fiscal year-end, the annual expense ratio is calculated by dividing the fund's operational expenses by its average net assets. If the fund's assets are increasing faster than its costs, you'll enjoy lower expenses as a fund shareholder.

It's not competitive or promotional. It's not an attempt to attract more money. It's just how we've been doing business for more than 40 years.