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The expense ratio is the yearly cost of owning a fund, deducted automatically from returns. It sounds small but compounds heavily over decades: a 1% expense ratio can consume a large share of lifetime gains compared with a 0.05% index fund. Minimizing fees is one of the few investing levers fully within your control.
On $100,000, a 0.04% expense ratio costs $40 a year; a 1% ratio costs $1,000.
Both index funds and ETFs track market indexes. But they work differently in ways that matter for taxes, trading, and minimum investment amounts.
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