What is Basis Point? (Plain English Definition)
A basis point is one-hundredth of a percentage point (0.01%), commonly used to express small differences in interest rates and fund fees.
Last updated: April 2026
Definition: A basis point is one-hundredth of a percentage point (0.01%), commonly used to express small differences in interest rates and fund fees.
Basis Point Explained Simply
A basis point, often abbreviated as "bp" or "bps" (pronounced "bips"), equals 0.01%, or one one-hundredth of a percent. Financial professionals use basis points instead of percentages to avoid ambiguity when discussing small changes. For example, saying a fee increased by 5 basis points is clearer than saying it increased by 0.05 percentage points, which could be confused with a 0.05% change.
Basis points are used throughout the investment world. Expense ratios are often discussed in basis points -- an ETF with a 0.03% expense ratio charges 3 basis points. Interest rate changes by the Federal Reserve are typically reported in basis points -- a 25 basis point rate hike means rates went up by 0.25%. Bond yield changes, bid-ask spreads, and fund performance differences are all commonly expressed in basis points.
To convert basis points to a percentage, divide by 100. So 50 basis points equals 0.50%, and 100 basis points equals 1.00%. Going the other way, multiply a percentage by 100 to get basis points.
Basis Point Example
ETF A charges an expense ratio of 3 basis points (0.03%) while ETF B charges 20 basis points (0.20%). The difference is 17 basis points. On a $100,000 portfolio, this 17 basis point difference means ETF B costs $170 more per year than ETF A. Over 30 years at 8% annual growth, that 17 basis point difference could cost you over $12,000 in lost returns.
Why Basis Point Matters for ETF Investors
Basis points may seem trivially small, but they matter enormously over long investment horizons. In the ETF world, the difference between a fund charging 3 basis points and one charging 50 basis points can amount to tens of thousands of dollars over a lifetime of investing. For ETF investors, fluency in basis points helps you compare funds precisely. When evaluating similar ETFs, differences of even 5 to 10 basis points in expense ratios are worth considering, especially for core holdings that will represent a large portion of your portfolio for decades.
Basis Point vs Expense Ratio
| Basis Point | Expense Ratio |
|---|---|
| A basis point is one-hundredth of a percentage point (0.01%), commonly used to express small differences in interest rates and fund fees. | See full definition of Expense Ratio |
While basis point and expense ratio are related concepts, they serve different purposes when picking and evaluating ETFs. Understanding both terms helps you make more informed decisions about which funds to include in your portfolio and how to evaluate their performance.
Related Terms
Deepen your understanding of ETF investing by exploring these related concepts:
Expense Ratio
The expense ratio is the annual fee an ETF charges its shareholders, expressed as a percentage of your investment.
Management Fee
A management fee is the charge levied by a fund manager for overseeing and operating an investment fund, which is a component of the expense ratio.
Bid-Ask Spread
The bid-ask spread is the difference between the highest price a buyer will pay and the lowest price a seller will accept for a security.
Interest Rate
An interest rate is the cost of borrowing money or the return earned on lending money, expressed as a percentage of the principal amount.
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