expense ratio

Expense Ratio

The percentage of total fund assets that is used to cover expenses associated with the operation of a mutual fund. This amount is taken out of the fund's assets and lowers the return that fund holders achieve. These expenses include management fees and operating expenses. The management fee is the fee that is charged to the fund by the portfolio manager, and it is often a fixed percentage. The operating expenses are the expenses that the fund incurs through operation and this can include brokerage fees, taxes, investor services, and interest expenses.

Also known as the "management expense ratio" (MER).

Notes:

The amount of the MER is usually dependent on how active the portfolio manager is in the trading of the fund an actively managed fund will have a higher ratio than an index fund, for instance. It is important for investors to be aware of the MER as it affects the rate of return that an investor in the fund achieves. The amount of the MER must be stated in the fund's prospectus.

See also: 12B-1 Fees, Active Management, Contingent Deferred Sales Charge - CDSC, Expenses, Index Fund, Mutual Fund, Operating Expense, Passive Management, Portfolio Manager, Prospectus

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Expense ratio

The percentage of the assets that are 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 does not include brokerage costs for trading the portfolio, although these are reported as a percentage of assets to the SEC by the funds in a Statement of Additional Information (SAI). The SAI is available to shareholders on request. Neither the expense ratio nor the SAI includes the transactions costs of spreads, normally incurred in unlisted securities and foreign stocks. These two costs can add significantly to the reported expenses of a fund. The expense ratio is often termed an Operating Expense Ratio (OER).

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expense ratio

The proportion of assets required to pay annual operating expenses and management fees of a mutual fund. If a fund charges an annual fee of 50¢ per $100 of net assets, the expense ratio will be 0.5%. Expense ratios range from 0.4% to 1.0%, depending on the size of the fund and the degree of cost control employed by its managers. The expense ratio is independent of any sales fee.