A good expense ratio for an ETF is usually below 0.20%, though what matters depends on what kind of fund you own

The expense ratio is the annual cost the fund charges you as a percentage of your investment. An ETF with a 0.10% expense ratio costs you $10 per year on every $10,000 you hold. Most broad market index ETFs now charge between 0.03% and 0.20%. Actively managed ETFs — where a manager picks stocks rather than tracking an index — typically cost 0.40% to 1.00% or higher.

Whether a ratio is "good" depends on what the fund does. A 0.15% ratio on a total stock market index fund is reasonable. The same ratio on a niche sector fund or international emerging markets fund might be high, because those funds have more competition and lower costs available. A 0.80% ratio on an actively managed fund might be acceptable if the manager has a track record of beating the index after costs — though this is rare.

The key is that expense ratios compound over decades. A difference of 0.50% per year on a $50,000 investment becomes roughly $13,000 in lost growth over 30 years, assuming 7% annual returns. Small differences in cost matter more than most investors realize.

Key Takeaways

  • Broad market index ETFs should cost you 0.03% to 0.20% per year; anything above 0.25% is worth questioning.
  • Specialty funds — sector funds, international funds, bond funds — have different cost benchmarks; compare within the same category.
  • Actively managed ETFs cost more because someone is picking stocks, and most do not beat their index benchmark after paying their fees.
  • A 0.50% difference in expense ratio costs you roughly $13,000 in lost growth over 30 years on a $50,000 investment.

How to compare expense ratios across similar funds

The first step is to identify what category your fund belongs to. A U.S. total stock market index ETF competes against other U.S. total stock market index ETFs. An international bond ETF competes against other international bond ETFs. Comparing a sector ETF to a broad market ETF is not useful because they do different things.

Once you know the category, look at what the lowest-cost option charges. For U.S. stock index funds, several ETFs charge 0.03% to 0.04%. For bond index funds, costs range from 0.03% to 0.10%. For emerging markets stock funds, you will see 0.08% to 0.20%. If your fund charges significantly more than the cheapest option in its category, you are paying for something — either active management, a specialized strategy, or simply less competition in that niche.

You can find expense ratios on the fund provider's website, on financial data sites like Morningstar or Yahoo Finance, or in the fund's prospectus. The ratio is always listed as a percentage and is sometimes called the "net expense ratio" or "annual expense ratio."

Why lower is not always better

A fund with a 0.05% expense ratio is not automatically better than one with a 0.15% ratio if the more expensive fund does something different or serves a specific purpose in your portfolio. For example, a specialized real estate ETF might cost 0.12% while a broad market ETF costs 0.04%, but you are not choosing between them — you are choosing whether to own real estate exposure at all.

What matters is that you are not overpaying for what you are getting. If two funds track the same index or follow the same strategy, the cheaper one is the better choice. If they are different products, compare them on whether they fit your goals, then check whether the cost is reasonable for that type of fund.

Some investors also pay attention to whether a fund is passively managed (tracking an index) or actively managed (a manager picks holdings). Passive funds almost always have lower expense ratios because they simply hold the same stocks as an index. Active funds cost more because they employ analysts and traders. Over long periods, most active funds underperform their index benchmark after paying their fees, which is why many investors prefer passive index funds despite the lower cost.

Expense ratios versus other costs you pay

The expense ratio is not the only cost of owning an ETF. When you buy or sell shares, you may pay a trading commission to your broker, though most brokers now charge zero commission on ETF trades. You also pay the bid-ask spread — the difference between what buyers will pay and what sellers will accept — which is usually small for popular ETFs but can be larger for thinly traded funds.

If you hold the ETF in a taxable account and the fund distributes capital gains, you will owe taxes on those gains even if you did not sell. Index funds tend to distribute fewer capital gains than actively managed funds because they trade less often. This is another reason why expense ratio alone does not tell the full story.

For most investors, the expense ratio is still the largest controllable cost. Trading commissions are now zero at most brokers, and spreads are tiny on popular funds. But over 20 or 30 years, the expense ratio is what adds up.

Red flags: when an expense ratio is too high

If you see an expense ratio above 0.50% on a broad market index fund, something is wrong. There is no reason to pay that much for a fund that simply tracks a public index. Similarly, if you own two funds that track the same index but one costs 0.10% and the other costs 0.40%, the cheaper one is the obvious choice.

For actively managed funds, a ratio above 1.00% is worth scrutinizing. Ask yourself whether the fund has beaten its benchmark index over the past 5 or 10 years after paying its fees. If it has not, the high cost is not justified. Many investors find that they are better off buying a low-cost index fund and accepting market returns rather than paying for active management that does not outperform.

Specialty or niche funds sometimes charge higher ratios because they have smaller asset bases and fewer competitors. A 0.40% ratio on a small-cap value ETF might be reasonable, while the same ratio on a total stock market ETF would not be. Context matters, but the principle is the same: you should understand what you are paying for.

How expense ratios affect your long-term returns

The impact of expense ratios grows over time because of compounding. If you invest $10,000 in an ETF that returns 7% per year before fees, and the fund charges 0.10%, your net return is 6.90%. Over 30 years, that $10,000 grows to roughly $76,000. If you had chosen a fund with a 0.60% expense ratio instead, your net return would be 6.40%, and that same $10,000 would grow to roughly $65,000. The 0.50% difference in cost cost you about $11,000.

This is why even small differences in expense ratios matter for long-term investors. You cannot control market returns, but you can control what you pay. Choosing low-cost funds is one of the few reliable ways to improve your long-term results.

The effect is even larger if you are investing regularly. If you add $500 per month to your investment and the fund charges 0.10% versus 0.60%, the difference over 30 years is roughly $40,000 to $50,000 in lost growth. That is real money that stays in your pocket when you choose lower-cost funds.

Frequently Asked Questions

Is 0.20% a good expense ratio?

For a broad market index fund, 0.20% is acceptable but not the best available — you can find similar funds for 0.03% to 0.10%. For a specialty fund like a sector or international fund, 0.20% may be reasonable depending on what else is available in that category. Compare it to other funds that do the same thing.

Why do some ETFs cost so much more than others if they track the same index?

Sometimes they do not track exactly the same index, or one fund is much smaller and has higher costs per share. More often, it is simply that older or less popular funds have not lowered their fees to compete. If two funds track the same index, the cheaper one is the better choice.

Should I avoid ETFs with high expense ratios completely?

Not if the fund does something you need that no cheaper alternative offers. But if a cheaper fund exists that does the same thing, there is no reason to pay more. Always check whether a lower-cost option is available before you buy.

Do expense ratios include the cost of buying and selling shares?

No. The expense ratio is only the annual fund management cost. Trading commissions are separate (though most brokers charge zero commission now), and the bid-ask spread is a separate cost you pay when you buy or sell.

Can I find an ETF with a 0% expense ratio?

No. Even the cheapest ETFs charge something, usually 0.03% to 0.05%. Some funds have waived or capped their fees temporarily to attract investors, but there is no such thing as a truly free ETF. The cost of holding securities and maintaining the fund has to come from somewhere.