What is an expense ratio?

An expense ratio is a fund's yearly running cost as a percentage of the money invested in it. It is deducted from the fund's assets, so you see a slightly lower return rather than a bill. In Canada it is called the management expense ratio, or MER.

What is a good MER or expense ratio?

There is no single right number, but lower costs leave more of the return with you. Canada's securities regulator notes MERs range from under 1% to over 3%. Comparing a fund with similar funds that hold the same kind of assets is the useful test.

How much do fees really cost over time?

More than the yearly percentage suggests, because fees compound. The SEC's example shows $100,000 growing at 4% for 20 years reaching about $208,000 with a 0.25% fee but about $179,000 with a 1% fee.

Investment fees: expense ratios, MERs and what they cost you

How investment fees work: expense ratios and MERs, commissions, spreads, advice and platform fees, with a calculator showing what fees cost over time.

Part of the Investing Foundations track on Agenticks. About 10 minutes, written for a beginner reader.

Read first: Index funds explained: what they are and how they work, Compounding and why time horizon matters.

Last reviewed 2026-11-08.

Key takeaways

Fees come in two families: one-off costs each time you trade, and ongoing costs charged every year whatever happens.
A fund's expense ratio, called the MER in Canada and close to the OCF in the UK, comes out of the fund, so you never see a bill.
Ongoing fees compound against you. A 1.5% fee on a 5% return takes almost a third of the return every year.
Fees stack: a fund's cost, an advice fee and an account fee can all apply to the same money at once.

Nobody can choose what the market returns next year. Fees are different: they are one of the few parts of investing you can see in advance and control. They also look small, which is why they are easy to ignore. A fee of 1% sounds like almost nothing, but it is charged every year, on all of your money, and the money it removes can never grow again. The US Securities and Exchange Commission shows it with $100,000 growing at 4% a year for 20 years. With a 0.25% yearly fee it ends at about $208,000. With 0.50% it ends at about $198,000. With 1.00% it ends at about $179,000. Same investment, same years, roughly $29,000 apart, and the only difference is the fee. This is compounding working against you instead of for you.

Investment fees fall into two families. Transaction fees are charged each time you buy or sell. They include trading commissions, sales charges on some mutual funds (called loads), and the bid-ask spread, which is not a fee anyone bills you for but is a real cost. You buy at the higher ask price and sell at the lower bid. If a share is quoted at $20.00 bid and $20.04 ask, buying 100 shares costs $2,004 and selling them straight back brings $2,000, so $4 is gone before the price has moved at all. The bid-ask spread lesson covers this in detail. Ongoing fees are charged regularly whether you trade or not. They include a fund's yearly running costs, fees for advice or a managed account, and account or platform fees. Because they never stop, ongoing fees usually do the most damage over a long horizon.

The ongoing fee almost everyone pays is the cost of the funds they hold. In the US this is the expense ratio: the share of a fund's assets used each year to pay its operating costs, shown in the fee table of the prospectus. In Canada the same idea is the management expense ratio, or MER, which combines the management fee, operating expenses and, for many mutual funds, a trailing commission paid to the firm that sold you the fund. Canada's Ontario Securities Commission notes that MERs range from under 1% to more than 3%. In the UK, fund documents show an annual management charge and an ongoing charges figure, or OCF, which includes extra running costs on top. Whatever the name, the mechanics are the same. The cost is taken out of the fund's assets, so you never see an invoice, only a slightly lower return. It is charged in good years and bad. And for funds that hold similar things, such as two funds tracking the same index, the fee is often the clearest difference between them. That is a big part of why index funds tend to be cheap: they have less to pay for.

Then come the costs of the account and any help with it. An advisory fee is usually a yearly percentage of the account's value: 1% on a $200,000 account is $2,000 a year. It is charged on top of the costs inside the funds the account holds, so an adviser charging 1% on funds costing 0.5% adds up to about 1.5% a year in total. Some platforms and brokerages also charge account fees, platform fees, or fees for transfers, inactivity and low balances, which the SEC notes may not be obvious from your statements. None of this means every fee is bad. Advice, planning and someone to talk you out of a panic sale can be worth paying for. The point is to know the total, all layers added together, and judge whether what you get is worth it.

Read a fee as a share of your return

A 1.5% fee does not sound like much against $10,000. Against an assumed 5% yearly return, it takes 1.5 of every 5 points, which is 30% of the growth, every single year. Seen that way, the gap between a 0.2% fund and a 1.5% fund is large.

Worked example: one investment, two fee levels, 30 years

You invest $10,000 once and add nothing more. Assume it grows 5% a year before fees, compounded yearly. The fee is subtracted from the return each year.

With no fee at all (10,000 x 1.05^30)	$43,219
With a 0.2% yearly fee (10,000 x 1.048^30)	$40,817
With a 1.5% yearly fee (10,000 x 1.035^30)	$28,068
Growth kept with the 0.2% fee (40,817 - 10,000)	$30,817 of $33,219
Growth kept with the 1.5% fee (28,068 - 10,000)	$18,068 of $33,219
Cost of the higher fee	$12,749, about 31% less money

Illustrative. The 5% return is an assumption, not a forecast. Real returns vary year to year and can be negative.

What two fee levels cost over time

Try your own numbers. The defaults assume $10,000 to start, $200 added each month, and 5% a year before fees, which is an assumption for illustration, not what any market will return. Change the two fee levels and watch the gap between the lines.

Fees are disclosed, but you usually have to look. For a fund, the yearly cost is in its key documents: the prospectus fee table in the US, the Fund Facts or ETF Facts document in Canada, and the published charges, including the OCF, in the UK. For an account, check the fee schedule, your statements and your trade confirmations. Add every layer that applies to the same money, then compare the total with alternatives that hold similar things. The fees and costs lesson covers the extra costs that come with frequent trading.

The SEC suggests asking whoever sells or manages an investment a few plain questions about cost. Put simply: What will I pay, directly and indirectly, to buy, hold and sell this, and is there a written fee schedule? Are there account, transfer, inactivity or minimum-balance fees? Is there a cheaper version of the same fund, such as another share class? How are you paid, and are you paid more for some products than others? How much does this investment have to rise before its costs are covered? Canadian readers will meet some older fee types that are now restricted. Since June 1, 2022, new purchases of mutual funds with a deferred sales charge, a fee for selling within a set number of years, have been banned, although units bought earlier can still carry it. Trailing commissions on funds held in self-directed accounts were banned on the same date.

Each time you trade: A commission on a share purchase, The bid-ask spread, A front-end sales charge on a mutual fund
Every year, trade or not: A fund's expense ratio or MER, A 1% yearly fee for a managed account, A yearly account or platform fee

You can read the cost of an investment

You know the difference between transaction and ongoing fees, what an expense ratio or MER is, how fees stack, and why they compound over time.

Check your understanding

Why can a 1% yearly fee cost far more than 1% of your money over 30 years?: The money taken each year can no longer grow, so the cost compounds. Every dollar paid in fees is a dollar that stops earning returns for every year that follows.
Which of these is an ongoing fee rather than a transaction fee?: A fund's expense ratio. It is charged every year as a percentage of your money, whether or not you trade.
An adviser charges 1% a year on a $200,000 account that holds funds with a 0.5% expense ratio. Roughly what is the total yearly cost?: About $3,000. $2,000 for advice plus $1,000 inside the funds. The two fees stack on the same money.
Where is a fund's expense ratio taken from?: Out of the fund's assets, which shows up as a slightly lower return. You never get a bill. The cost is deducted inside the fund before its returns are reported.

Common questions

What is an expense ratio?: An expense ratio is a fund's yearly running cost as a percentage of the money invested in it. It is deducted from the fund's assets, so you see a slightly lower return rather than a bill. In Canada it is called the management expense ratio, or MER.
What is a good MER or expense ratio?: There is no single right number, but lower costs leave more of the return with you. Canada's securities regulator notes MERs range from under 1% to over 3%. Comparing a fund with similar funds that hold the same kind of assets is the useful test.
How much do fees really cost over time?: More than the yearly percentage suggests, because fees compound. The SEC's example shows $100,000 growing at 4% for 20 years reaching about $208,000 with a 0.25% fee but about $179,000 with a 1% fee.

Terms defined in this lesson

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Sources

Written and reviewed by the Agenticks Learn editorial team. How we write and check lessons.

Agenticks Learn is general education. It is not financial, investment, tax or legal advice, it does not take your situation into account, and nothing on it is a recommendation to buy, sell or hold any security or to open any account. Examples use illustrative numbers. Investing involves risk, including losing money you put in, and past performance does not predict future results. Tax rules and limits change; the official sources linked in each lesson are the final word.