What is an expense ratio?

• A. A one-time sales charge to enter a fund.
• B. The tax paid on capital gains.
• C. The annual fee expressed as a percentage of a fund's assets to cover operating costs.
• D. The fee a broker charges to execute a trade.

Answer: (C)

The main concept being tested is what an expense ratio is: an ongoing annual fee charged by a fund to cover its operating costs, expressed as a percentage of the fund’s assets and deducted from those assets. This means the fee reduces the fund’s returns every year, regardless of how the fund performs.

This description fits best because it emphasizes that the expense ratio is not a one-time charge, not a tax on capital gains, and not a broker’s fee to place a trade. For example, if a mutual fund has an expense ratio of 1% and you have $10,000 invested, about $100 each year is used to pay for management, administration, and other costs. These costs compound over time, which is why comparing expense ratios matters for long-term growth. Keep in mind that transaction costs or sales charges are separate from the ongoing expense ratio.