Wednesday’s Word: Expense Ratio

By David Hsu Fall 2016 Student Intern

Thanks to John Oliver, many people have for the first time had their eyes opened to how the financial industry makes money through fees. Not only are there fees when it comes to investment firms managing your portfolio, however, the individual mutual funds themselves have expenses and fees within them. This bring us to today’s Wednesday’s Word: “Expense Ratio.”

What is the “expense ratio”?

Investment companies spend money in order to manage and operate a mutual fund, which is ultimately paid for by the fund itself. The ratio of the fund’s assets that go to managing a fund constitute the fund’s “expense ratio.”

Why is the expense ratio important?

Simply put, the higher the expense ratio, the more of a fund’s growth is absorbed by operating costs.

How can I find a fund’s expense ratio?

FINRA, the regulatory authority for the financial industry, maintains a free online tool to analyze mutual funds and determine the impact of fees and expenses on your investment. That tool can be found here.