Average Expense Ratios for Mutual Funds

Knowing the average expense ratio of mutual funds helps investors to choose their investments wisely. This is because lower expense ratios can translate into higher potential returns , especially for long-term investors. Therefore, buying funds with below-average expense ratios is a wise strategy for buying the best funds.

Average Expense Ratios By Mutual Fund Type

Comparing expense ratios of mutual funds is like comparing apples and oranges—average expenses tend to vary by mutual fund type. Therefore, when analyzing mutual funds, it's good to know the average expense ratio for the particular type of fund you are analyzing.

Once you know the average expenses for the type of fund you want to buy, you'll be armed with an important piece of information to help find the best funds for you.

Here is a breakdown and comparison of average expense ratios for basic fund types:

Note: The average mutual fund expense ratios in the above table were taken directly from Morningstar. Investors can research information about mutual fund expense ratios on similar mutual fund research sites or directly on the respective fund's fact sheet or prospectus provided by the mutual fund company. So, when researching mutual funds or exchange-trade funds (ETFS), be sure to compare expense ratios to similar funds with the respective category averages.

Key Takeaways On Average Mutual Fund Expense Ratios

Here are key takeaways on researching and comparing mutual fund expense ratios:

• Low expenses can translate to higher returns: Expenses for a mutual fund are taken from the fund's assets before the investors receive their net return. For example, if a fund has an expense ratio of 1.00%, and the fund has a return before expenses of 10.00%, the net return to the investor is 9.00% (10.00 - 1.00). All other things being equal the fund with the lowest expenses will generate higher net returns to the investor.
• Average expenses tend to vary by fund category: The fundamental reason for varying fund expenses is that the research costs for portfolio management are higher for certain types of mutual funds. For certain niche areas, such as small-cap stocks and foreign stocks, information is not as readily available compared to large domestic companies. Therefore, the added research required by the mutual fund analysts and managers will naturally drive the operation costs of the mutual fund higher.
• Index Funds and ETFs tend to have the lowest expense ratios: Since they are passively managed, meaning the fund manager is only tracking the stocks or bond withing the fund's benchmark index, an index fund's operational costs can be kept extremely low. For example, an S&P 500 index fund simply holds the same stocks that are in the S&P 500 index and therefore no research or analysis is required to find the stocks or bonds to buy for the fund, as is the case with actively-managed funds.

Bottom Line

Knowing the average expense ratios of mutual funds can be helpful when researching which funds an investor would like to buy. The reason for this is that lower expenses can translate to higher long-term returns, compared to similar funds with higher expenses.

Index funds and ETFs generally have lower expenses, compared to actively-managed funds. Index funds can have expense ratios lower than 0.10%, whereas average expenses can often be five times higher . Some ETFs have expense ratios even lower than index mutual funds.

With that said, the funds with the lowest expense ratios are not always the best. Therefore, when analyzing a mutual fund, the expense ratio is just one of several things to consider before you buy the fund.

Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.