In order to invest in many different companies with one investment, people can buy mutual funds or exchange traded funds (ETF’s). These combined investments require management, record keeping, etc. In order to recoup these costs, these types of investment vehicles withdraw a percentage of your assets each year. This withdrawal percentage is referred to as the expense ratio. Some companies are more efficient than others, so expense ratios vary across the industry. Funds that have active portfolio managers that perform research on potential investments cost more than funds that only invest in an index like the S&P 500. Expense ratios are something to watch because fees that are being used to pay fund expenses are being taken out of your account over time. This continual drain reduces your overall return in an investment.
Do not confuse the Expense Ratio with the Turnover Ratio. The Turnover Ratio is the percentage of assets that have been replaced with other holdings during the year. A higher Turnover Ratio equates to higher brokerage transaction fees (which are not a part of the Expense Ratio). Mutual Funds and ETF’s that track an index (like the ETF’s recommended above) have a much lower Turnover Ratio than actively managed investments.
The bottom line is that lower Expense Ratios and lower Turnover Ratios mean that more of your funds remain invested in the market.