What is an expense ratio and why does it matter?

An expense ratio is the annual fee a fund charges as a percentage of assets under management. A 0.03% expense ratio on a $10,000 investment costs $3/year. A 1.0% ratio costs $100/year. Over 30 years, a 1% difference in fees can reduce your final portfolio value by 20–25% due to compounding. Always prioritize low-cost funds; expense ratios are one of the best predictors of long-term performance.