A reasonable expense ratio for an actively managed portfolio ranges from 0.5% to 0 or 75%, while an expense ratio greater than 1.5% is normally considered high today. For passive or index funds, the typical ratio is approximately 0.2%, but may be as low as 0.02% or less in some cases. Let's say you send two teams of runners to run a marathon, but you need one team to carry 25-pound backpacks. Which team do you think is most likely to have the best average time? What is reasonable? It depends on the type of fund.
Index funds should have the lowest fees, since they cost relatively little to operate. You can easily find an S%26P 500 index fund with an expense ratio of less than 0.2%, for example. For mutual funds that invest in large U.S. companies, look for an expense ratio of no more than 1%.
And for funds that invest in small or international companies, which usually require more research, look for an expense ratio of no more than 1.25%. Just as your profits increase due to compound interest, so are your expenses, so can there be a big difference in earnings if you decide to invest in a fund with a high spending ratio. What is clear is that investors are not required to pay high fees to invest in ETFs, and should prioritize investing only in those ETFs with competitive and stable spending ratios. For example, international funds are often very expensive to operate because they invest in many countries and can have staff all over the world (which equates to higher research and payroll expenses).
With so many ETFs available on the market, you can find those with the best spending ratios in the categories that interest you using an ETF analyzer. To see how expense ratios can affect your investments over time, let's compare the returns of several hypothetical investments that only differ in the spending ratio. If you care about a low ETF spending ratio, you can prioritize investment options, such as index funds. In terms of logistics, the fee you owe annually to the ETF administrator, determined by the current spending ratio and the value of your shares, is automatically deducted from your investment account.
The expense ratio of an ETF indicates how much of your investment in a fund will be deducted annually as fees. The ETF expense ratio, which is calculated annually and published in the fund's prospectus and shareholder reports, directly reduces the fund's return to its shareholders and, therefore, the value of the investment. While important, a fund's spending ratio is not the only consideration when analyzing and comparing a fund's investments. If you're interested in investing in exchange-traded funds (ETFs), you've probably heard something about expense ratios.
Since many ETFs have low expense ratios, investing only in those with very attractive expense ratios doesn't greatly limit your investment options. A good rule of thumb is not to invest in any fund with an expense ratio greater than 1%, as many ETFs have much lower spending ratios. Keep in mind that this fee is charged in addition to the ratio of expenses you will have to pay for each fund you invest in. Expense ratios can diminish the returns on your investments, so it's important to know what they are and how they work.