Quant · Core
Expense Ratio
The expense ratio is annual fund costs as a percent of AUM — the fee drag you pay whether the manager is right or not.
Definition
Management fees, admin, and some distribution sit in the ratio. Performance fees, spreads, and securities-lending splits often do not. A 5bp index ETF and a 150bp active fund are different products even if they hold cousins.
Why it matters
Over a decade, fees dominate most active-vs-passive debates. Compounded 1% is not a rounding error.
Case
Two S&P trackers: 3bp vs 40bp. Same index, different owner-earnings. The expensive one needs a lending or tax story to exist.
How to read it
Add bid-ask, tracking difference, and performance fees to the sticker TER. The all-in number is the product.
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