A zero commission trade does not make a fund free
The expense ratio is important, but it is not the only cost worth reading.
An investment can cost money even when a brokerage does not charge a commission to buy it. The trade and the fund are different layers of the transaction, and each can have its own costs.
Mutual funds and ETFs have operating expenses. Instead of sending each investor a separate bill for those expenses, a fund pays them from its assets. That reduces the value available to shareholders and lowers investment returns.
The expense ratio expresses total annual fund operating expenses as a percentage of the fund's average net assets. The SEC says funds must disclose a standardized table of fees and expenses in their prospectuses. That table is a useful starting point for comparing costs.
It is not the whole picture. The SEC notes that some costs do not appear in the expense ratio, including transaction costs incurred when a fund buys and sells its underlying securities. Investors may also face brokerage charges or fees paid to an adviser.
For ETFs, the market price can differ from the value of the underlying portfolio per share, known as net asset value or NAV. Buying above NAV or selling below it can affect what an investor pays or receives. Those differences are separate from the annual expense ratio.
The takeaway is to read both the fund documents and the brokerage's fee schedule. A low-cost fund can be worth investigating, but cost alone does not establish whether an investment fits a person's goals and risks. This is an explanation of fees, not a recommendation to buy or sell a fund.