What is an expense ratio, and why does it matter?

The expense ratio is what a fund costs you to own, expressed as a percentage of your investment per year. A fund with a 0.05 percent expense ratio takes $5 a year from every $10,000; one at 1 percent takes $100. You never see a bill; the fee is skimmed from the fund’s returns before they reach you.

That invisibility is why it matters. A 1 percent fee sounds trivial and compounds to something large. Two investors put $10,000 a year into funds earning 7 percent before fees, one paying 0.05 percent and one paying 1 percent. After thirty years the difference is well over $150,000. The high-fee investor paid that for nothing in particular.

Index funds are cheap because nobody is being paid to pick stocks. The largest S&P 500 and total-market ETFs charge between 0.03 and 0.1 percent. Actively managed funds charge more because they employ analysts, and the record shows most of them do not earn it back.

Where to find it: it is printed on every fund’s page and in the prospectus, usually near the top. If you are comparing two similar funds and cannot decide, pick the cheaper one. It is the one factor about a fund that reliably predicts its future returns relative to peers.