Expense Ratio

A A A

DEFINITION

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. Operating expenses are taken out of a fund's assets and lower the return to a fund's investors.

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

INVESTOPEDIA EXPLAINS

Depending on the type of fund, operating expenses vary widely. The largest component of operating expenses is the fee paid to a fund's investment manager/advisor. Other costs include recordkeeping, custodial services, taxes, legal expenses, and accounting and auditing fees. Some funds have a marketing cost referred to as a 12b-1 fee, which would also be included in operating expenses. A fund's trading activity, the buying and selling of portfolio securities, is not included in the calculation of the expense ratio.

Costs associated with mutual funds but not included in operating expenses are loads and redemption fees, which, if they apply, are paid directly by fund investors.


VIDEO

RELATED TERMS
  1. Mutual Fund Wrap

    Also known as a mutual fund advisory program or a wrap account, these programs ...
  2. Foregone Earnings

    The difference in earnings or performance between what is actually achieved ...
  3. Contingent Deferred Sales Charge ...

    A fee (sales charge or load) that mutual fund investors pay when selling Class-B ...
  4. Operating Expense

    A category of expenditure that a business incurs as a result of performing its ...
  5. Total Expense Ratio - TER

    A measure of the total costs associated with managing and operating an investment ...
  6. Turnover Ratio

    The percentage of a mutual fund or other investment vehicle's holdings that ...
  7. Before Reimbursement Expense Ratio

    The percentage of a fund's average net assets that is used to cover the annual ...
  8. After Reimbursement Expense Ratio

    The actual expense paid by mutual fund investors. The after reimbursement expense ...
  9. Acquired Fund Fees And Expenses ...

    A line item in a fund-of-funds' prospectus that shows the operating expenses ...
  10. Compound Annual Growth Rate - CAGR

    The year-over-year growth rate of an investment over a specified period of time. ...
Related Articles
  1. Are Mutual Funds Doomed?
    Mutual Funds & ETFs

    Are Mutual Funds Doomed?

  2. Advantages And Disadvantages Of ETFs
    Mutual Funds & ETFs

    Advantages And Disadvantages Of ETFs

  3. The Hidden Differences Between Index ...
    Mutual Funds & ETFs

    The Hidden Differences Between Index ...

  4. Will A New Fund Manager Cost You?
    Mutual Funds & ETFs

    Will A New Fund Manager Cost You?

  5. Management Expense Ratio
    Investing

    Management Expense Ratio

  6. Active Vs. Passive ETF Investing
    Mutual Funds & ETFs

    Active Vs. Passive ETF Investing

  7. Stop Paying High Mutual Fund Fees
    Mutual Funds & ETFs

    Stop Paying High Mutual Fund Fees

  8. Digging Deeper: The Mutual Fund Prospectus
    Mutual Funds & ETFs

    Digging Deeper: The Mutual Fund Prospectus

  9. Hedging With Puts And Calls
    Markets

    Hedging With Puts And Calls

  10. What are the advantages and disadvantages ...
    Investing

    What are the advantages and disadvantages ...

comments powered by Disqus
Hot Definitions
  1. Cash and Carry Transaction

    A type of transaction in the futures market in which the cash or spot price of a commodity is below the futures contract price. Cash and carry transactions are considered arbitrage transactions.
  2. Amplitude

    The difference in price from the midpoint of a trough to the midpoint of a peak of a security. Amplitude is positive when calculating a bullish retracement (when calculating from trough to peak) and negative when calculating a bearish retracement (when calculating from peak to trough).
  3. Ascending Triangle

    A bullish chart pattern used in technical analysis that is easily recognizable by the distinct shape created by two trendlines. In an ascending triangle, one trendline is drawn horizontally at a level that has historically prevented the price from heading higher, while the second trendline connects a series of increasing troughs.
  4. National Best Bid and Offer - NBBO

    A term applying to the SEC requirement that brokers must guarantee customers the best available ask price when they buy securities and the best available bid price when they sell securities.
  5. Maintenance Margin

    The minimum amount of equity that must be maintained in a margin account. In the context of the NYSE and FINRA, after an investor has bought securities on margin, the minimum required level of margin is 25% of the total market value of the securities in the margin account.
  6. Leased Bank Guarantee

    A bank guarantee that is leased to a third party for a specific fee. The issuing bank will conduct due diligence on the creditworthiness of the customer looking to secure a bank guarantee, then lease a guarantee to that customer for a set amount of money and over a set period of time, typically less than two years.
Trading Center