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Expense Ratio

Definition

The expense ratio of a stock or asset fund is the total percentage of fund assets used for administrative, management, advertising, 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.

An Expense Ratio is an annual fee that exchange-traded funds charge shareholders. It is the amalgamation of assets that have been deducted year after year for expenditures such as, management fees, 12b-1 (advertising) fees, administrative fees, operating costs and other asset based costs that are incurred by the fund. The expense ratio does not however include brokerage costs or initial sales charges. The expense ratio is accrued on a daily basis via deduction from the fund’s average net assets. If the assets are small the expense ratio can be high since the fund has got to meet its expenses from a restricted asset base. On the other hand, as the net assets grow, the expense percentage should diminish since all the expenses are spread across a wider base. There are two major types of Expense ratio;

Annual Gross Expense Ratio

The Annual Gross Expense Ratio is the percentage of fund assets that are paid of interest expense, management fees and operating costs. The expense ratio includes the following fees;

  • Transfer agency
  • Sub advisor
  • Shareholder reporting
  • Registration
  • Professional
  • Organizational
  • Legal
  • Interest and dividends on borrowed securities
  • Distribution
  • Custodial
  • Board of Directors
  • Audit
  • Advisor
  • Administrator
  • Accounting

The expense ratio does not necessarily reflect the brokerage costs of the fund or any investor sales charges. The gross expense ratio unlike the net expense ratio does not reflect the fee waivers that are in effect for a particular period of time.

Annual Net Expense Ratio

The Annual Net Expense Ratio is the percentage of the fund paid for management fees and operating expenses. In includes all of the fees of the Gross Expense Ratio but, in comparison to the Gross Expense Ratio, the Net Expense Ratio does reflect the fee waivers in effect during that time, and does not include the interest or dividends on borrowed securities. Annual Net Expense Ratio reflect the actual fees that are charged during the fiscal year while the prospectus expense ratio reflects the material changes to the expense structure for the current time period.


Further Reading


Managing mutual funds or managing expense ratios? Evidence from the Greek fund industry
www.sciencedirect.com [PDF]
… noting that other types of fees (front or back-end loads, deferred sales) are not included in the constructed variable, defined as the total expense ratio (TER), hence this is an operational expense ratio. The TER variable is defined as the ratio of a fund's total expenses over its …

Ownership, independent directors, agency costs and financial distress: evidence from Chinese listed companiesOwnership, independent directors, agency costs and financial distress: evidence from Chinese listed companies
www.emerald.com [PDF]
… noting that other types of fees (front or back-end loads, deferred sales) are not included in the constructed variable, defined as the total expense ratio (TER), hence this is an operational expense ratio. The TER variable is defined as the ratio of a fund's total expenses over its …

Nonprofit arts organizations: Debt ratio does not influence donations—Interest expense ratio doesNonprofit arts organizations: Debt ratio does not influence donations—Interest expense ratio does
journals.sagepub.com [PDF]
… noting that other types of fees (front or back-end loads, deferred sales) are not included in the constructed variable, defined as the total expense ratio (TER), hence this is an operational expense ratio. The TER variable is defined as the ratio of a fund's total expenses over its …

The impact of expenses on equity mutual fund performanceThe impact of expenses on equity mutual fund performance
search.proquest.com [PDF]
… noting that other types of fees (front or back-end loads, deferred sales) are not included in the constructed variable, defined as the total expense ratio (TER), hence this is an operational expense ratio. The TER variable is defined as the ratio of a fund's total expenses over its …

Measuring economies of size with expense ratiosMeasuring economies of size with expense ratios
www.jstor.org [PDF]
… noting that other types of fees (front or back-end loads, deferred sales) are not included in the constructed variable, defined as the total expense ratio (TER), hence this is an operational expense ratio. The TER variable is defined as the ratio of a fund's total expenses over its …

Performance and characteristics of actively managed retail equity mutual funds with diverse expense ratiosPerformance and characteristics of actively managed retail equity mutual funds with diverse expense ratios
papers.ssrn.com [PDF]
… noting that other types of fees (front or back-end loads, deferred sales) are not included in the constructed variable, defined as the total expense ratio (TER), hence this is an operational expense ratio. The TER variable is defined as the ratio of a fund's total expenses over its …

Financial performance, risk, and specializationFinancial performance, risk, and specialization
ageconsearch.umn.edu [PDF]
… noting that other types of fees (front or back-end loads, deferred sales) are not included in the constructed variable, defined as the total expense ratio (TER), hence this is an operational expense ratio. The TER variable is defined as the ratio of a fund's total expenses over its …

Persistence of mutual fund operating characteristics: returns, turnover rates, and expense ratiosPersistence of mutual fund operating characteristics: returns, turnover rates, and expense ratios
www.tandfonline.com [PDF]
… noting that other types of fees (front or back-end loads, deferred sales) are not included in the constructed variable, defined as the total expense ratio (TER), hence this is an operational expense ratio. The TER variable is defined as the ratio of a fund's total expenses over its …

Personal financial wellnessPersonal financial wellness
link.springer.com [PDF]
… noting that other types of fees (front or back-end loads, deferred sales) are not included in the constructed variable, defined as the total expense ratio (TER), hence this is an operational expense ratio. The TER variable is defined as the ratio of a fund's total expenses over its …



Q&A About Expense Ratio


What is an example of an efficiency ratio?

Citigroup, Inc. (23)

Are there different types of Expense Ratios ?

Yes, there are two major types; Annual Gross Expense Ratio and Annual Net Expense Ratio .

Why do you need to know about operating leverage and its relationship with efficiency ratios?

You need to know about operating leverage and its relationship with efficiency ratios because they can help you determine whether a company has generated enough cash in relation to other years and in relation to other institutions.

How do you calculate a fund's net expense ratio?

You take all of the expenses except for any fee waivers in effect during that time period and divide them by average net assets.

Does an Annual Gross Expense Ratio reflect Fee Waivers in Effect During That Time Period ?

No it doesn't because it takes into account interest on borrowed securities as well as any rebates or commissions paid to brokers who sell shares to investors .

Does the expense ratio include brokerage costs or initial sales charges?

No, it does not.

What does the expense ratio include?

The expense ratio includes management fees, 12b-1 (advertising) fees, administrative fees, operating costs and other asset based costs that are incurred by the fund.

What does an Annual Net Expense Ratio consist of ?

It consists of management fees , operating expenses , other asset based costs .

What does the efficiency ratio indicate?

The efficiency ratio indicates the expenses as a percentage of revenue.

What is the Expense Ratio?

The expense ratio is an annual fee that exchange-traded funds charge shareholders.

What is another name for this type of ratio?

Operating leverage.

What does an Annual Gross Expense Ratio consist of ?

It consists of interest expenses , management fees , operating costs , other asset based costs .

How do you calculate a fund's gross expense ratio?

You take all of the expenses and divide them by the average net assets of a fund.

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