The expense ratio is the percentage of a mutual fund or ETF’s assets under management that go toward paying the fund’s annual operating expenses, which includes the salary of the fund manager/advisor, recordkeeping fees, taxes, and accounting and auditing fees. These operating expenses reduce the amount of capital in the fund to be invested, which inevitably lowers the fund’s returns. Expense ratios have been trending down for decades. According to an Investment Company Institute report, the average expense ratio for index equity mutual funds fell from 0.27% in 1996 to 0.06% in 2021.