Expense Ratio

AAA

DEFINITION of '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. 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 'Expense Ratio'

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

Loading the player...
RELATED TERMS
  1. Mutual Fund Wrap

    Also known as a mutual fund advisory program or a wrap account, ...
  2. Acquired Fund Fees And Expenses ...

    A line item in a fund-of-funds' prospectus that shows the operating ...
  3. Total Expense Ratio - TER

    A measure of the total costs associated with managing and operating ...
  4. Foregone Earnings

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

    A fee (sales charge or load) that mutual fund investors pay when ...
  6. Operating Expense

    A category of expenditure that a business incurs as a result ...
RELATED FAQS
  1. What information does the SEC require in an investment company's prospectus?

    A prospectus is the document provided by registered investment companies to investors that is meant to assist them in making ... Read Full Answer >>
  2. Why do index funds tend to have low expense ratios?

    Index funds tend to have low expense ratios because there is less active management required to run them. There is less turnover ... Read Full Answer >>
  3. When is an expense ratio considered high and when is it considered low?

    A number of factors determine when an expense ratio is relatively high or low, but a good, low expense ratio is generally ... Read Full Answer >>
  4. Why is a mutual fund's expense ratio important to investors?

    A mutual fund's expense ratio is very important to investors because fund operating and management fees can have a large ... Read Full Answer >>
  5. What are some of the limitations of only looking at the rate of return for an investment?

    Analyzing investment performance over a specific time frame is a tool commonly used by investors to compare investments opportunities ... Read Full Answer >>
  6. What kinds of expenses are included in the expense ratio?

    Investors who utilize mutual funds or exchange-traded funds (ETFs) in their investment strategies must take into consideration ... Read Full Answer >>
  7. What are the most common ETFs that track the financial services sector?

    The Standard & Poor's Depositary Receipt (SPDR) Financial Select Sector Fund (XLF) has net assets of $17.73 billion and ... Read Full Answer >>
  8. What are some of the most popular mutual funds for investing in the metals and mining ...

    Mutual funds are one of the many investment options available for growth investors looking for a portfolio that includes ... Read Full Answer >>
  9. What are the most popular mutual funds that give exposure to the railroads sector?

    The railroad industry makes up nearly half of North American freight transportation from city to city and can provide dependable ... Read Full Answer >>
  10. What are the advantages and disadvantages of mutual funds?

    Mutual funds are currently the most popular investment vehicle and provide several advantages to investors, including the ... Read Full Answer >>
Related Articles
  1. Mutual Funds & ETFs

    Are Mutual Funds Doomed?

    Decreases in mutual fund classes and the growing use of ETFs means the future of mutual funds will be anything but smooth.
  2. Mutual Funds & ETFs

    Advantages And Disadvantages Of ETFs

    You've probably heard that ETFs are better than mutual funds, but you need to consider all aspects before investing.
  3. Mutual Funds & ETFs

    The Hidden Differences Between Index Funds

    These funds don't all match index returns. Find out how to avoid costly surprises.
  4. Mutual Funds & ETFs

    Will A New Fund Manager Cost You?

    Learn how a change in leadership could mean more taxes for you.
  5. Mutual Funds & ETFs

    Active Vs. Passive ETF Investing

    You can use these securities for more than just indexing. Explore the spectrum of possible ETF strategies.
  6. Mutual Funds & ETFs

    Stop Paying High Mutual Fund Fees

    Discover how investment strategies and expense ratios impact your mutual fund's returns.
  7. Mutual Funds & ETFs

    Digging Deeper: The Mutual Fund Prospectus

    The legal jargon of this document can be daunting. Find out how to get to the important stuff.
  8. Markets

    Hedging With Puts And Calls

    This trading strategy can reduce your risk - but only if you use it effectively.
  9. Mutual Funds & ETFs

    Mutual Fund Basics Tutorial

    Learn about the basics - and the pitfalls - of investing in mutual funds.
  10. Economics

    Understanding Carrying Value

    Carrying value is the value of an asset as listed on a company’s balance sheet. Carrying value is the same as book value.

You May Also Like

Hot Definitions
  1. Fixed-Income Arbitrage

    An investment strategy that attempts to profit from arbitrage opportunities in interest rate securities. When using a fixed-income ...
  2. Venture-Capital-Backed IPO

    The selling to the public of shares in a company that has previously been funded primarily by private investors. The alternative ...
  3. Merger Arbitrage

    A hedge fund strategy in which the stocks of two merging companies are simultaneously bought and sold to create a riskless ...
  4. Market Failure

    An economic term that encompasses a situation where, in any given market, the quantity of a product demanded by consumers ...
  5. Unsystematic Risk

    Company or industry specific risk that is inherent in each investment. The amount of unsystematic risk can be reduced through ...
  6. Security Market Line - SML

    A line that graphs the systematic, or market, risk versus return of the whole market at a certain time and shows all risky ...
Trading Center