Learn · Hedge Fund Basics
What Does Each Type of Fund Actually Cost?
Most funds charge a yearly fee called an expense ratio, and in 2025 the average dollar in a stock index mutual fund paid 0.05% while the average dollar in an actively managed stock mutual fund paid 0.64%, according to the Investment Company Institute. What else an investor pays depends on the structure around the fund: a sales charge on the way in, a trading cost on an exchange, a fee on the way out, or a separate bill from a retirement plan or an adviser.
The ETF, often thought of as the cheapest way to own an index, does not win on this measure. Stock index ETFs averaged 0.14% in 2025, nearly three times the index mutual fund figure, and an ETF adds a small trading cost every time an investor buys or sells. The averages are weighted by assets, so they describe the average invested dollar rather than the average fund.
The SEC's investor bulletin on fees shows why fractions of a percent deserve attention: $100,000 invested for 20 years at 4% a year ends near $208,000 with 0.25% in annual fees and near $179,000 with 1%. Where a structure charges can matter as much as how much it charges, because it decides whether the short-term holder, the long-term holder, or the frequent trader ends up paying the most. The sections below follow the order of the series' guide to the different types of funds.
Where does the money go?
Every charge pays someone. The expense ratio covers the cost of running the fund, including the manager's fee and administration such as accounting and legal work. In some share classes it also includes a 12b-1 fee, named for the SEC rule that lets a fund pay for marketing and distribution, and sometimes shareholder services, out of its assets. Nobody receives a bill for it. The fund deducts it from its assets a little at a time, so it shows up only as a slightly lower return. Most other charges go to people outside the fund, such as the broker who sold it, the market makers who buy and sell its shares on an exchange, the banks that sold its first shares, or the plan or adviser through which it is held.
Why is an index fund so cheap?
An index fund copies a published list of securities, such as the S&P 500, so it does not pay analysts to pick investments and trades mainly when the list changes or when money comes in and goes out. Those savings help explain why stock index mutual funds averaged 0.05% in 2025, about $5 a year on every $10,000. An ETF version of the same index adds a small cost each time it is bought or sold, and a retirement plan version can add plan fees.
What does a mutual fund cost?
An actively managed mutual fund pays people to choose its investments, which is a large part of why actively managed stock mutual funds averaged 0.64% in 2025. How the fund is sold adds its own costs. Many mutual funds come in several share classes, which own the same portfolio but charge differently. A class with a front-end load takes a sales charge out of the purchase, so with a 5% load, $10,000 buys $9,500 of shares, and the percentage usually falls at larger purchase amounts called breakpoints. A level-load class skips the upfront charge and collects more each year through a higher 12b-1 fee, often with a deferred sales charge if the shares are sold within a set period.
Choosing between those two classes is a bet on time. The upfront charge is paid once, while the higher yearly fee is paid for as long as the money stays, so a short holding period generally favors the level-load class and a long one favors paying up front.
FINRA rules cap combined front-end and deferred sales charges at 8.5% of the purchase price for funds that do not also collect a yearly sales fee, and cap 12b-1 fees at 0.75% of assets a year for selling the fund plus 0.25% for servicing investors' accounts. Some funds also charge a redemption fee on shares sold soon after purchase. It goes back into the fund to discourage rapid trading, and SEC Rule 22c-2 caps it at 2% of the amount redeemed.
In 2025, 92% of purchases of mutual funds, leaving out money market funds, went to share classes with no load and no 12b-1 fee, up from 46% in 2000. The institute ties much of that shift to investors paying their advisers a separate fee instead, which moves part of the cost outside the fund.
What does an ETF cost?
An ETF charges an expense ratio like any fund; the institute's 2025 averages were 0.14% for stock index ETFs and 0.40% for actively managed stock ETFs. Most investors buy and sell ETF shares on an exchange rather than with the fund, so most of the remaining cost comes from trading. A buyer generally pays the ask, the lowest price a seller will accept, and a seller receives the bid, the highest price a buyer will pay. The gap between them is the bid-ask spread. The SEC describes it as a hidden cost, and it does not appear in the fund's fee table. Some brokers also charge a commission, though many charge none for online trades, and the market price can sit slightly above or below the value of the fund's holdings.
A buy-and-hold investor crosses the spread only twice, once going in and once coming out, and over many years the expense ratio usually makes up most of what that investor pays. For someone who trades every week, the spread is paid again and again and can end up costing more than the expense ratio.
Some exchange-traded products carry costs that ordinary ETFs do not. Leveraged and inverse ETFs aim to deliver a multiple of an index's daily move, such as twice it, or the opposite of it, and they reset that target every day. The SEC warns that they may cost more than traditional ETFs and that over longer periods their returns can differ significantly from the multiple they target. An exchange-traded note, or ETN, owns no portfolio at all. It is unsecured debt of the financial institution that issued it, so no specific assets stand behind it and its value depends on the issuer's ability to pay. A daily investor fee also reduces that value.
A commodity trust that holds physical gold typically pays its sponsor, the firm that runs it, by selling some of the gold, so each share represents a little less metal every year. A fund that holds futures, contracts to buy a commodity on a later date, has to replace each one before it expires, which is called rolling. When the next contract costs more, a condition called contango, the fund can afford a little less of the commodity after every roll. Fidelity notes that these roll costs can be substantial.
What does a CIT cost?
A collective investment trust, or CIT, often costs less than the mutual fund version of the same strategy. Morningstar data for 2025, cited by the law firm Mayer Brown, put the average actively managed CIT at 0.239% a year against 0.601% for actively managed mutual funds, and the average index-tracking, or passive, CIT at 0.031% against 0.074%. Morningstar groups and measures funds differently from the institute, so its averages do not match the figures above.
Much of the saving comes from costs a CIT does not carry. A bank-administered trust offered to eligible retirement plans avoids a mutual fund's registration, retail marketing, and distribution costs, including 12b-1 fees, and sometimes lets a plan negotiate its fee directly with the trustee. The trade-off is access, since IRA holders cannot invest in CITs; most people reach one only through a workplace plan, where recordkeeping and administrative fees can be added on top.
What do closed-end funds, interval funds, UITs, and BDCs cost?
A closed-end fund whose shares trade on an exchange is usually most expensive to buy on its first day. At the initial public offering, buyers pay a sales charge built into the price, which Fidelity puts at about 4.5% of the money raised in a typical offering. The SEC notes that closed-end shares typically fall in price after the offering and trade at a discount to the value of their holdings. A later buyer on the exchange pays ordinary brokerage costs instead and may buy at that discount, though the SEC notes that the investor may also be unable to sell except at a discount.
An interval fund buys shares back only on a schedule, every three, six, or twelve months, and only 5% to 25% of its shares at a time. It can deduct a repurchase fee of up to 2% of the proceeds, which is paid to the fund to cover the cost of the repurchase, and the SEC notes that its fees can be higher than other funds' in some cases.
A unit investment trust, or UIT, collects most of its charges early in its life: a sales charge, taken at purchase or deferred, that includes a creation and development fee for assembling the portfolio, plus organization costs and an annual operating fee. Because a UIT ends on a fixed date, an investor who rolls the proceeds into a new trust can pay those charges again, and FINRA notes that the rollover discounts sponsors once offered are uncommon today.
A business development company, or BDC, invests in and lends to small and midsize private companies, and the SEC's bulletin notes that BDCs often charge more than mutual funds or ETFs. By its description, a typical BDC charges a management fee of 1.5% to 2% of gross assets plus an incentive fee of up to 20% of profits. Gross assets include what the BDC buys with borrowed money, so a BDC that borrows more generally pays its manager a larger base fee.
What do hedge funds and other private funds cost?
A hedge fund usually charges in two parts: a management fee on assets and a performance fee, which is a share of profits. The traditional shorthand is two and twenty, meaning 2% of assets and 20% of gains, though terms vary widely. Rules decide when the performance fee is earned, such as a hurdle rate, a minimum return the fund must earn first, and a high-water mark, which keeps a manager from being paid again for gains that only make up earlier losses. The series covers those rules in What Does a Hedge Fund Actually Charge? The structure described here is the industry's traditional arrangement; each fund's own terms are set out in its offering documents.
Private equity, venture capital, real estate, and private credit funds use a similar two-part model, with a difference in timing. According to the investment platform iCapital, the management fee is typically 1% to 2% and is often charged on the full amount investors have committed, including money the fund has not yet asked them to send. Carried interest, the manager's share of profits, has traditionally run from 10% to 20%, and in private equity it usually applies only after investors receive a minimum return, commonly 8%. Portfolio companies may also pay the manager directly for services such as monitoring.
In a separately managed account, the investor owns the securities directly instead of owning shares of a fund, and usually pays an adviser a fee based on a percentage of the account. A wrap fee program bundles advice and trading into one percentage fee, though the SEC notes that mutual fund expenses and other charges may still be paid on top.
Strategy labels carry typical costs of their own, whatever structure holds them. The institute's 2025 averages were 0.40% for stock mutual funds, 0.36% for bond mutual funds, 0.27% for target-date mutual funds, which shift from stocks toward bonds as a chosen retirement year approaches, and 0.24% for money market funds.
Which structure costs the least?
No structure is cheapest in every case. Fees vary from fund to fund, and each structure charges on a different clock. An upfront charge, such as a front-end load or a closed-end fund's offering charge, weighs most on an investor who leaves early. A yearly fee weighs most on one who stays for decades, and trading costs grow with every trade. A UIT's sales charge falls in between, because it comes back each time the money rolls into a new trust. With the invented rates in the calculator below, the level-load class of an active fund costs less than the front-load class for any stay of up to six years, and the front-load class costs less from year seven on.
A higher fee can also pay for something, such as active management, advice, access to private companies, or the convenience of a workplace plan. The useful comparison adds up every charge and weighs the total against what it pays for and how long the money will stay invested.
The calculator below compares any two of eight structures using invented fee rates, so the effect of the holding period and of trading can be tested directly. It leaves out taxes, which can also differ from one structure to another and with how often a fund trades.
Pick two structures and a holding period. Every fee rate here is invented for education, and both structures earn the same invented 4% a year before costs, so the only difference between them is how and when each one charges.
Show the numbers as a table
A charge on the way in weighs most on a short stay, and a yearly fee weighs most on a long one. Trading costs grow with every trade, and a sales charge that comes back at every rollover adds up much like a yearly fee. Neither of the two structures is cheaper in every case. Invented rates used here: index mutual fund 0.05% a year; active fund with a front-end load 5% at purchase plus 0.85% a year; active fund with a level load 1.60% a year plus 1% if sold within a year; index ETF 0.10% a year plus 0.05% of the balance per trade; CIT 0.03% a year plus a 0.20% plan fee; closed-end fund bought at its offering 4.5% at purchase plus 1.20% a year; interval fund 1.80% a year plus a 1% repurchase fee; UIT 2.5% at purchase and again at each 2-year rollover, plus 0.20% a year. Taxes are ignored. These rates, the 4% return, and every result are invented for education and depend entirely on the inputs. They do not describe any actual fund's terms, are not an offer, and are not a prediction or projection of performance.
Frequently asked questions
What is an expense ratio?
An expense ratio is a fund's yearly operating cost as a percentage of its assets, covering the management fee, administration, and in some share classes a 12b-1 fee. It is deducted from the fund's assets rather than billed. A 0.50% expense ratio costs about $50 a year for every $10,000 invested.
Are ETFs cheaper than mutual funds?
Not always. In 2025 the Investment Company Institute's asset-weighted averages were 0.14% for stock index ETFs and 0.05% for stock index mutual funds. ETFs also carry trading costs such as the bid-ask spread, while some mutual fund share classes add sales loads or 12b-1 fees, so the cheaper choice depends on the specific funds and how often the investor trades.
What is a 12b-1 fee?
A 12b-1 fee is an annual charge inside some mutual funds' expense ratios that pays for marketing and distribution, and sometimes shareholder services, often including compensation for the broker who sold the fund. FINRA rules cap it at 0.75% of assets a year for distribution and 0.25% for service.
What is the difference between a front-end load and a back-end load?
A front-end load is a sales charge deducted when shares are bought, so part of the investment never reaches the fund. A back-end or deferred load is charged when shares are sold within a set period and usually shrinks the longer they are held.
How much does a hedge fund charge?
Hedge funds traditionally charge a management fee on assets and a performance fee on profits, summarized as two and twenty: 2% of assets and 20% of gains. Actual terms vary widely by fund and depend on rules such as hurdle rates and high-water marks, which are set out in each fund's offering documents.