How does the expense ratio of an index fund affect its performance?

The expense ratio of an index fund can affect its performance because it represents the amount of fees that the fund charges investors for managing their investments. The expense ratio is expressed as a percentage of the fund's assets under management and covers the costs of operating the fund, such as administrative expenses, management fees, and other expenses.

A higher expense ratio will generally result in lower net returns for investors, as more of their investment returns are consumed by fees. Therefore, investors should look for index funds with low expense ratios to maximize their returns. It's important to note that while index funds are generally known for their low expense ratios compared to actively managed funds, there can still be significant differences in expense ratios between different index funds.

Investors should also consider other factors besides expense ratios when evaluating index funds, such as the fund's tracking error, liquidity, and diversification.