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Expense Ratio

What is an expense ratio?

A fund's expense ratio expresses the percentage of fund assets deducted each fiscal year for fund costs, which include management fees, administrative fees, operating costs, and sometimes even marketing and distribution costs incurred by the fund. Portfolio transaction fees, or brokerage costs, as well as initial or deferred sales charges are not included in the expense ratio.

It’s critical to evaluate expenses, as they come directly out of returns. If the fund's asset base is small, its expense ratio can be high because the fund must pay these various costs from this smaller asset base. Conversely, as the net assets of the fund grow, the expense ratio should ideally decrease as costs are spread across the wider base.