Learn what an expense ratio measures and why recurring charges affect the balance available to grow.
Educational scenarios, not observed prices, fund performance or investment recommendations. Rates are assumptions and can change.
Sources reviewed: 2026-10-20What it means
A fund’s expense ratio expresses annual operating expenses relative to its average net assets. These expenses reduce assets inside the fund and are not necessarily a separate bill. The ratio is only one part of ownership costs; commissions, spreads and other charges may also matter.
- Expense ratio
- Annual fund operating expenses expressed as a percentage of the fund’s average net assets. It does not include every possible ownership cost.
- Fee drag
- The reduction in the modeled ending balance compared with a matching no-fee case, including forgone growth on deducted amounts.
How the calculation works
This illustration starts with 1,000 units and assumes 5% annual gross growth for twenty years. After each year’s growth, the selected percentage fee is deducted from that balance. The reference line applies no fee. Their ending-value difference includes the modeled deductions and the growth those deductions no longer earn.
Formula
With fee = 1,000 × [1.05 × (1 − f / 100)]^20; No fee = 1,000 × 1.05^20
Try a hypothetical example
Fixed 1,000 units, twenty years, 5% gross annual growth, fee deducted after each year’s growth; no cash flows or taxes.
- Without the modeled fee
- 2653.30
- With the modeled fee
- 2170.15
Fixed reference cases
The file contains the same fixed educational reference cases for everyone. It excludes your search and current example choices.
| Assumption (%) | Reference case | Example case |
|---|---|---|
| 0% | 2653.30 | 2653.30 |
| 0.25% | 2653.30 | 2523.74 |
| 0.5% | 2653.30 | 2400.20 |
| 1% | 2653.30 | 2170.15 |
| 2% | 2653.30 | 1771.36 |
| 3% | 2653.30 | 1442.85 |
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What the example does not show
Real funds do not necessarily deduct an entire annual expense ratio once at year end. This is a simplified annual model, not a fund’s NAV accounting or a way to deduct costs again from an already net return. The full fee calculator uses a separate monthly model. Compare disclosed costs and assumptions together; lower fees alone do not guarantee a better investment outcome.
Official educational references
Original explanation and example calculations by FinanceVelix. References support the concepts, not an endorsement of this site.
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https://financevelix.com/en/learn/expense-ratio