do etf returns include expense ratio

ETF returns typically reflect performance after deducting the expense ratio, making it crucial to consider when comparing returns and choosing ETFs with competitive expense ratios.

Oct 14, 2024 at 08:06 pm

Do ETF Returns Include Expense Ratio?

1. Understanding Expense Ratio

An expense ratio is an annual fee charged by an exchange-traded fund (ETF) to cover its operating expenses. These expenses may include management fees, administrative costs, and other operating expenses. The expense ratio is typically expressed as a percentage of the fund's assets under management (AUM).

2. Calculation of ETF Returns

When calculating the returns of an ETF, the expense ratio is typically already taken into account. This means that the returns you see typically reflect the performance of the underlying investments after deducting the expense ratio.

However, it's important to note that the expense ratio is an ongoing fee, which means that it will continue to reduce the returns of the ETF over time. Therefore, it's essential to consider the expense ratio when comparing returns between ETFs and other investment options.

3. Factors that Influence Expense Ratio

The expense ratio of an ETF is influenced by various factors, including:

Fund size: Larger funds typically have lower expense ratios due to economies of scale.
Management fees: The fees charged by the fund's investment manager for managing the portfolio.
Administrative and operational costs: Costs associated with the fund's administration, such as custodian fees, legal fees, and accounting fees.

4. How to Choose an ETF with a Low Expense Ratio

When selecting an ETF, it's crucial to consider the expense ratio and compare it to similar ETFs in the market. You can typically find expense ratios listed in the fund's prospectus or summary sheet available on the fund's website.

It's generally recommended to choose ETFs with low expense ratios. However, it's also essential to consider other factors, such as the fund's tracking error and investment strategy, when making an investment decision.

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