How to Calculate the Weighted Average Expense Ratio of Your Portfolio

The weighted average expense ratio of your portfolio is an important number to know. Most people know that expenses have a huge impact on your portfolio over time since they are a drag on investment returns.

If your portfolio returns 11% during a particular year before adjusting for expenses, and your portfolio has a weighted expense ratio of 1%, your portfolio returns after adjusting for expenses will be 10%.

Lets assume you have a portfolio of $10,000 invested in the following Fidelity index funds:

Fund	Ticker	Balance
Fidelity S&P 500 Index Fund	FXAIX	$   5,000.00
Fidelity Large Cap Value Enhanced Index	FLVEX	$   2,500.00
Fidelity Large Cap Growth Index	FSPGX	$   2,500.00

The expense ratios associated with each of the funds are as follows:

Fund	Exp Ratio
Fidelity S&P 500 Index Fund	0.015%
Fidelity Large Cap Value Enhanced Index	0.390%
Fidelity Large Cap Growth Index	0.035%

Adding the expense ratios together and dividing by three would yield an arithmetic average of 0.147%; however, that is not the actual average of the portfolio itself since there are different dollar amounts in each fund.

In order to calculate the weighted average, we need to multiply the dollar amount in each fund by that specific fund’s expense ratio:

Fund	Balance	Exp Ratio	Dollar Exp
Fidelity S&P 500 Index Fund	$    5,000.00	0.015%	$       0.75
Fidelity Large Cap Value Enhanced Index	$    2,500.00	0.390%	$       9.75
Fidelity Large Cap Growth Index	$    2,500.00	0.035%	$       0.88
TOTALS	$ 10,000.00		$    11.38

Based on the table above, the Fidelity Large Cap Value Enhanced Index contributes $9.75 in total portfolio expenses on a weighted basis. This amount is calculated by multiplying $2,500 by the expense ratio of 0.39%.

Calculating the dollar contribution of expenses for every fund in the portfolio and summing them together gives you a total dollar expense of $11.38 on a weighted basis. This total dollar expense is divided by the total portfolio value of $10,000 to calculate the weighted average of 0.1138% which is less than the arithmetic average of 0.147%.

Fund	Balance	Exp Ratio	Dollar Exp	Weighted Avg
Fidelity S&P 500 Index Fund	$    5,000.00	0.015%	$       0.75
Fidelity Large Cap Value Enhanced Index	$    2,500.00	0.390%	$       9.75
Fidelity Large Cap Growth Index	$    2,500.00	0.035%	$       0.88
TOTALS	$ 10,000.00		$    11.38	0.1138%

In this hypothetical scenario, the weighted average is actually lower than the arithmetic average; however, that may not always be the case. Depending on the expense ratios and dollar allocations in your portfolio, it is possible that the weighted average could be higher than the arithmetic average.

If you have a portfolio that includes both active and passive management, calculating the weighted average expense ratio will provide you with a clearer understanding of the impact investment costs may have on the future value of your portfolio over longer periods of time.

The Excel model used to calculate the weighted average can be found here.