What is an ETF expense ratio and why is it important?
The expense ratio is the rate you are charged for investing in an ETF. Even passively managed index funds have expense ratios. Understanding how an expense ratio works is very important to maximizing returns when you invest.
How is the expense ratio calculated?
Money invested * expense ratio.
1000 * .06% = $6
The expense ratio is charged annually based off of how much you have invested in the fund
Why does it matter if it is so small?
Just like interest rates that expense ratio you pay will compound over the years. So if you were to keep averaging into an ETF over the years the expense ratio could cost you a lot of money
What is a good Expense Ratio?
The average expense ratio for an ETF is 0.44%. Mutual funds are actively managed and generally have a higher average expense ratio around 1%. We recommend checking out Vanguard ETF's. They are known for having excellent average returns and well below average expense ratios. The majority of their funds have an expense ratio of 0.06%!