Summary
One aspect of ETF investing that is often listed as a “downside” when compared to investing in individual companies is the “expense ratio” (ER) – that usually small percentage (most frequently less than 1%) that represents the costs incurred by the fund's issuer in the course of managing the fund.
There is no “expense ratio” involved in owning stock in a company.1
While a lot of ETF investors pay close attention to a fund's ER, I tend to put very little weight on it when deciding whether to invest in a fund. In fact, for many funds, I do not look at it at all. Why? Because on the whole I do not think that spending a lot of time worrying about ERs is needed, and is not really useful. I intend to explain why I feel this way in what follows.
What is the Expense Ratio?
In its most basic concept, the ER reflects the costs involved in managing a fund.2 However, while the basic concept behind the ER may seem fairly straightforward, it is important to pinpoint as precisely as possible what it represents and how it is reached.
The following items are typically included as components of the ER:
What is not included in the ER:
Management fees can be found in a fund's annual report. The report should have a section titled “Statement of Operations,” which will include income andexpenses. The problem is that issuers, while required to report the data to investors, are not required to identify exactly how much was spent on what particular item.
