What exactly is an expense ratio and what would be a good expense ratio for a mutual fund?

An expense ratio is the cost investment companies charge investors to manage a mutual fund. It represents all of the management fees and operating costs of the fund.

The average expense ratio for actively managed mutual funds is between 0.5% and 1.0% and typically goes no higher than 2.5%, although some fund ratios have gone higher. For passive index funds, the typical ratio is approximately 0.2%.

As a rule of thumb, look for mutual funds that invest in large companies to have an expense ratio of no more than 1% while a fund that focuses on small companies or international stocks should have an expense ratio lower than 1.25%.

Hope this helps!

The expense ratio is what it costs the company to operate a mutual fund or ETF.

Typically, because mutual funds are more active (they trade more or use derivatives), their expense ratios are higher since those actions cost money. ETFs tend to be cheaper because they only need mimic securities, which is much cheaper.

A good expense ratio for a mutual fund really depends on the asset. There are some basic global standards:

0.4 - 0.7 ETFs

0.7 - 0.9% Index Funds

1.25% - 1.5% Mutual Funds (Efficient Equities)

0.75% - 1.1% Mutual Funds (Bonds)

Investopedia

Etc etc.

Obviously, lower funds are generally useful in creating alpha and generating more net return, but the context is important. Emerging funds for example, typically can go as high as 1.75%, 2% but you get plenty more bang for your buck, at least historically when compared to Global or US equities which you can get cheaply.

So it really depends more on fund performance.

Personally, I have no problem paying more for higher risk and higher return, which is why my customized portfolios for clients will do better in the long term. But not everyone is suitable for such risks, since expense is also a risk.

If you're comfortable, you can always reach out to me to have a chat about it.

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