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So I recently looked at Vanguard Total market Index fund, which has an expense ratio of 0.05%.

How is this number calculated? The numerator is various operating expenses of the fund, but no source tells me what the denominator is.

Also, does this mean that I need to subtract 0.05% from the reported annual growth of, say, 8% growth to get my real return?

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up vote 5 down vote accepted

The denominator is the fund value. The expenses are taken from the fund over the course of the year, so you're not going to find a way to sell one day, skip the fee, and buy back. The daily pricing is net of expenses, so you don't subtract. In the case of the Vanguard 500 mimicking the S&P, you'll see it lags the S&P return by the advertised .05%.

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remember too that some funds may lag the index by more than their expense ratio for whatever reason (like poor indexing) or may outperform their index because of composition or securities lending. +1 – Michael A Aug 18 '14 at 13:22

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