Expense ratio

The management fee and running costs of a fund, stated as an annual percentage of net assets. It is not invoiced. It accrues daily against the fund's assets, so it reaches the holder as a slightly lower net asset value than the fund's holdings alone would produce. Nothing appears on a statement, which is why a cost of this kind is easy to overlook and why it is published in the fund's own documents rather than derived from a price series.

It is the largest of the structural reasons a fund does not return exactly what its index returns. The others are the cost of trading inside the fund when the index rebalances, the treatment of withholding tax on dividends, and any cash the fund holds between flows. Together they produce the tracking difference, and the expense ratio is the component that is known in advance and applies whatever the market does.

The difference does not always run one way. A fund that lends its holdings out for a fee returns part of that income to the fund, which can offset some of the charge, and a fund that samples an index rather than holding it in full can land on either side of the published return. The published ratio is therefore an input to the difference rather than a prediction of it.