Expense Ratio

Total Annual Fund Operating Expenses ("Expense Ratio") — the line of the fee table in the prospectus that represents the total of all of a fund's annual fund operating expenses, expressed as a percentage of the fund's average net assets. Looking at the expense ratio can help you make comparisons among funds. [http://www.sec.gov/investor/pubs/inwsmf.htm#factors Sources of Information]

The expense ratio of a stock or asset fund is the total percentage of fund assets used for administrative, management, advertising (12b-1), and all other expenses. An expense ratio of 1% per annum means that each year 1% of the fund's total assets will be used to cover expenses. The expense ratio does not include sales loads or brokerage commissions.

Expense ratios are important to consider when choosing a fund, as they can significantly affect returns. Factors influencing the expense ratio include the size of the fund (small funds often have higher ratios as they spread expenses among a smaller number of investors), sales charges, and the management style of the fund. A typical annual expense ratio for a U.S. domestic stock fund is about 1%, although some passively managed funds (such as index funds) have significantly lower ratios: for example, the Vanguard US Large Cap ETF has an expense ratio of 0.07%. [http://www.ishares.net/content/stream.jsp?url=/publish/repository/documents/en/downloads/product_list_uk.pdf]

One notable component of the expense ratio of U.S. funds is the "12b-1 fee", which represents expenses used for advertising and promotion of the fund. 12b-1 fees are generally limited to a maximum of 1.00% per year (.75% distribution and .25% shareholder servicing) under NASD Rules.

Waivers, Reimbursements & Recoupments

Some funds will execute "waiver or reimbursement agreements" with the fund's adviser or other service providers, especially when a fund is new and expenses tend to be higher (due to a small asset base). These agreements generally reduce expenses to some pre-determined level or by some pre-determined amount. Sometimes these waiver/reimbursement amounts must be repaid by the fund during a period that generally cannot exceed 3 years from the year in which the original expense was incurred. If a recoupment plan is in effect, the effect may be to require future shareholders to absorb expenses of the fund incurred during prior years.

Changes in Expense Ratio (Fixed & Variable Expenses)

Generally, unlike past performance, expenses are very predictive. Funds with high expenses ratios tend to continue to have high expenses ratios. An investor can examine a fund's "Financial Highlights" which is contained in both the periodic financial reports and the fund's prospectus, and determine a fund's expense ratio over the last five years (if the fund has five years of history). It is very hard for a fund to significantly lower its expense ratio once it has had a few years of operational history. This is because funds have both fixed and variable expenses, but most expenses are variable. Variable costs are fixed on a percentage basis. For example, assuming there are no breakpoints, a .75% management fee will always consume .75% of fund assets, regardless of any increase in assets under management. The total management fee will vary based on the assets under management, but it will always be .75% of assets. Fixed costs (such as rent or an audit fee) vary on a percentage basis because the lump sum rent/audit amount as a percentage will vary depending on the amount of assets a fund has acquired. Thus, most of a fund's expenses behave as a variable expense and thus, are a constant fixed percentage of fund assets. It is therefore, very hard for a fund to significantly reduce its expense ratio after it has some history. Thus, if an investor buys a fund with a high expense ratio that has some history, he/she should not expect any significant reduction.

Expenses Matter Relative to Investment Type

There are 3 broad investment categories for mutual funds (equity, bond, and money market - in declining order of historical returns). That is an over simplification but adequate to explain the effect of expenses. In an equity fund where the historical gross return might be 10%, a 1% expense ratio will consume approximately 10% of the investor's return. In a bond fund where the historical gross return might be 8%, a 1% expense ratio will consume approximately 12.5% of the investor's return. In a money market fund where the historical gross return might be 5%, a 1% expense ratio will consume approximately 20% of the investor's historical total return. Thus, an investor must consider a fund's expense ratio as it relates to the type of investments a fund will hold.


Wikimedia Foundation. 2010.

Look at other dictionaries:

  • expense ratio — The percentage of the assets that are spent to run a mutual fund (as of the last annual statement). This includes expense such as management and advisory fees, overhead costs, and 12b 1 fees (distribution and advertising) fees. The expense ratio… …   Financial and business terms

  • Expense ratio — The percentage of the assets that were spent to run a mutual fund (as of the last annual statement). This includes expenses such as management and advisory fees, overhead costs and 12b 1 (distribution and advertising ) fees. The expense ratio… …   Financial and business terms

  • Expense Ratio — A measure of what it costs an investment company to operate a mutual fund. An expense ratio is determined through an annual calculation, where a fund s operating expenses are divided by the average dollar value of its assets under management.… …   Investment dictionary

  • expense ratio — Proportion or ratio of expenses to income …   Black's law dictionary

  • Total Expense Ratio — Die Total Expense Ratio (Abkürzung: TER) oder Gesamtkostenquote ist eine Kennzahl, die Aufschluss darüber gibt, welche Kosten bei einem Investmentfonds jährlich zusätzlich zum Ausgabeaufschlag anfallen. Die Total Expense Ratio greift auf Ebene… …   Deutsch Wikipedia

  • After Reimbursement Expense Ratio — The actual expense paid by mutual fund investors. The after reimbursement expense ratio is calculated by subtracting any reimbursements made to the fund by the management and contractual fee waivers from the gross expense ratio. Also known as the …   Investment dictionary

  • Operating Expense Ratio - OER — A measure of what it costs to operate a piece of property compared to the income that the property brings in. The operating expense ratio is calculated by dividing a property s operating expense by its gross operating income. Investors using the… …   Investment dictionary

  • Housing Expense Ratio — A ratio comparing housing expenses to before tax income that is used by lenders to qualify borrowers for a mortgage. The housing expense measure includes mortgage principal, interest payments, property taxes, hazard insurance, mortgage insurance… …   Investment dictionary

  • Total Expense Ratio — The Total Expense Ratio, or TER, is measuring the total costs of a fund investment. Total costs may include various fees (trading, auditing) and other expenses. The TER is calculated by dividing the total cost by the fund s total assets and is… …   Wikipedia

  • Benefit Expense Ratio — An operating metric used in the health insurance industry computed by dividing a company s costs associated with providing health services by the revenues from member premiums. Because of the large dollar values involved, a single percentage… …   Investment dictionary


Share the article and excerpts

Direct link
Do a right-click on the link above
and select “Copy Link”

We are using cookies for the best presentation of our site. Continuing to use this site, you agree with this.