What is a good expense ratio?

Short answer: there is no single expense ratio that is “good” for every fund. A useful rule is simpler: compare funds that are trying to do the same job, then pay close attention to cost. If two broad U.S. stock index funds track nearly the same market, the lower-cost one starts with an advantage because less money is being removed from the fund each year.¹ But a specialized active fund and a broad index fund are not identical products, so cost is one factor — not the whole decision.

First: what exactly is an expense ratio?

A mutual fund or ETF has operating costs — investment management, administration, accounting, custody and other expenses. The fund pays those costs from fund assets. The expense ratio expresses annual fund operating expenses as a percentage of the fund's average net assets.¹

That wording sounds more complicated than the idea. Imagine a large community garden. Everyone owns a small share of it, and the garden has maintenance costs. Instead of mailing every owner a separate bill, the garden pays the costs before dividing up what remains. A fund expense ratio works in a similar way: the cost is reflected in the investment's net return rather than arriving as a separate annual invoice.

Turn the percentage into dollars

Percentages are easy to ignore. Dollars are easier to understand. On a $100,000 balance, the approximate first-year fund cost looks like this:

Industry averages provide context, not a pass/fail line. For 2025, the Investment Company Institute reported asset-weighted average expense ratios of 0.40% for equity mutual funds, 0.36% for bond mutual funds, 0.14% for index equity ETFs, and 0.09% for index bond ETFs.² Those averages mix many products and strategies. They are useful landmarks, not a rule that says every fund above or below them is automatically good or bad.

Why a few tenths of a percent can matter

The annual dollar difference may look modest. The long-term difference can be larger because money used to pay expenses is money that no longer compounds. Here is a Terra-modeled illustration using a $100,000 starting balance, 6% gross annual return, no additions or withdrawals, and a 25-year horizon:

This does not mean the lower-cost fund will necessarily earn the higher return. The two funds may own different investments or follow different strategies. It means the higher-cost fund has a little more ground to make up before the investor ends in the same place.

So what counts as “good”?

Instead of memorizing one magic percentage, use three questions.

1. What job is the fund doing?

A broad index fund is designed to capture a market at low cost. An actively managed fund pays a team to research and select investments. A sector fund may focus on a narrow industry. A target-date fund bundles several asset classes and changes its mix over time. Those are different jobs, and the cost comparison should start with funds that perform a similar job.

2. Is the cost competitive with similar choices?

The SEC specifically encourages investors to compare a fund's fees and expenses with other investment options that can meet the same objective.³ FINRA's Fund Analyzer can compare expense ratios and estimate how product and account-level fees affect future value.⁴

3. What are you receiving for the extra cost?

Higher cost is not proof of higher quality. Lower cost is not proof that a fund fits your needs. If a fund is more expensive than a comparable alternative, understand what is different — strategy, exposure, risk management, services or something else — and decide whether that difference matters to you.

Do not confuse the expense ratio with your total investing cost

The expense ratio is only the fund's operating-expense layer. Depending on the account and product, you could also encounter an advisory fee, plan administration fee, sales load, brokerage commission, account fee or other cost. The SEC notes that some costs are not included in the prospectus expense ratio.¹

Where do I find the expense ratio?

For mutual funds and ETFs, start with the fund's prospectus. The SEC requires a standardized fee table that identifies total annual fund operating expenses — the expense ratio — along with certain other fees.¹ Shareholder reports also include expense information. Inside a 401(k), your plan's comparative investment disclosure should provide fee and expense information for the plan's investment options.

What this does not say

It does not say to choose the cheapest fund in every situation. A 0.04% bond index fund and a 0.70% growth-stock fund are not substitutes just because one is cheaper. The investment objective, risk, diversification and role in your portfolio come first. Cost becomes especially powerful as a decision tool when the alternatives are genuinely comparable.

References

1. U.S. Securities and Exchange Commission, Office of Investor Education and Assistance — Mutual Fund and ETF Fees and Expenses – Investor Bulletin (July 23, 2025). Explains the prospectus fee table, annual operating expenses, expense ratios and costs not included in the ratio. Investor.gov · Fund and ETF fees
2. Investment Company Institute — Mutual Fund and ETF Fees Remained Near Historic Lows in 2025 (March 25, 2026). Reports 2025 asset-weighted average expense ratios by broad fund type. ICI · 2025 fee trends
3. U.S. Securities and Exchange Commission — Investor.gov, Understanding Fees. Encourages investors to compare fees among products that can meet the same investment objective and to translate fees into understandable terms. Investor.gov · Understanding Fees
4. FINRA — Fund Analyzer Overview. Describes FINRA's tool for comparing fund and account-level fees and their effect on future value. FINRA Fund Analyzer

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