An expense ratio is what a fund charges each year to operate, expressed as a percentage of the money you have in it. A fund with a 0.50% ratio costs $50 a year on a $10,000 position. It covers the manager, the custodian, the accounting, and the fund's own marketing.
Why you never see the charge
The fee is not billed to you and never appears as a transaction on your account. It is deducted from the fund's assets before the share price is struck, a slice at a time across the year, so the only trace of it is a share price slightly lower than it would otherwise have been. That is what makes it easy to hold a fund for a decade without ever having looked at what it costs.
Why it compounds
A ratio charged every year applies to the balance that remains after every previous year's charge, so its cost is not the ratio multiplied by the number of years. On $100,000 held flat, a 1% ratio takes about $9,562 over ten years rather than the $10,000 a flat reading suggests — and the gap widens the longer the position is held and the larger it grows.
What the number does and does not tell you
The ratio is the fund's operating cost, and it excludes several things that also cost money: sales loads charged when you buy or sell, brokerage commissions on your own trades, and the trading costs the fund itself incurs inside the portfolio. Two funds with the same ratio can still differ on those.
It also says nothing about whether a fund is worth holding. A ratio is a fact about price, not a judgment about value, and a cheaper fund is not automatically a better one for any particular purpose.
Why it is worth knowing yours
Fees are one of the few things about an investment that are known in advance. A return is a forecast; a ratio is a published number that will be charged whatever the market does. NetWorthy reports the annual cost of the ratios recorded against your holdings, and what they compound to over ten, twenty and thirty years, so the figure is something you have seen rather than something you have to go looking for.
See also Cost Basis.