Expense Ratio

Running a fund costs money, and the expense ratio is how that cost is collected. A ratio of 0.03 percent means three cents a year for every hundred dollars held. It is not invoiced and it does not appear as a line on a statement; it is netted out of the fund's value continuously, which is exactly why it goes unnoticed.

The range across the industry is wide. Funds that simply track an index have very low ratios, because tracking requires little judgment. Funds where a manager actively picks holdings charge more, because they employ people to pick.

The reason this small number gets so much attention is that it is one of the few things about a fund that is known in advance. Returns are not knowable ahead of time; the fee is printed. Compounded over the decades that fund holdings are typically kept, a difference of a fraction of a percent a year is not a rounding error.