What Is the Gross Expense Ratio (GER)?

The gross expense ratio (GER) is the total percentage of a mutual fund's assets that are devoted to running the fund. The gross expense ratio includes any fee waiver or expense reimbursement agreements that may be in effect. However, it does not include any sales or brokerage commissions that are not charged to the fund directly but which would be included in the net expense ratio.

Sometimes referred to as the audited gross expense ratio, data providers such as Morningstar pull the annual gross expense ratio from the fund’s audited annual report. Annual-report expense ratios reflect the actual fees charged during a particular fiscal year, while prospectus expense ratios reflect material changes to the expense structure for the current period.

Key Takeaways

  • The gross expense ratio (GER) is the annual cost of investing in a mutual fund or ETF, or the portion of the assets earmarked for the cost of operating the fund.
  • GER includes fee waivers or expense reimbursements, but not sales or brokerage commissions that aren't charged directly to the fund.
  • It differs from the net expense ratio, which includes the fund's management fees, administrative costs, and other costs, but does not include fee waivers or expense reimbursements.

How the Gross Expense Ratio (GER) Works

The gross expense ratio is important because it informs the investors about the total amount of fees charged for managing the fund. These fees matter because they affect the net return produced by the fund and received by the investors. If these fees are high, the fund's net return after fees is negatively affected in a material way.

The discussion around Mutual Funds' GER has grown with the rise of exchange-traded funds (ETFs), which are more competitive in this regard. The gross expense ratio includes all fees incurred by the fund including management fees, 12B-1 fees, administrative costs, and operating expenses. Investors should compare the gross expense ratio to a fund’s net expense ratio and understand the differences involved.

In some cases, a fund may have agreements in place for waiving, reimbursing, or recouping some of the fund’s fees. This is often the case for new funds. An investment company and its fund managers may agree to waive certain fees following the launch of a new fund to keep the expense ratio lower for investors. The net expense ratio represents the fees charged to the fund after any waivers, reimbursements, and recoupments have been made. These fee reductions are typically for a specified time frame after which the fund may incur all full costs.

For example, if a fund has a net expense ratio of 2% and a gross expense ratio of 3%, it is readily apparent that 1% of the fund's assets were used to waive fees, reimburse expenses or provide other rebates not included in the net expense ratio. This is important because such rebates and reimbursements may or may not continue in the future. Prudent investors will want to examine both expense ratios and compare them to like funds before investing.

Examples of Gross Expense Ratios

In general, passively managed funds, such as index funds, will typically have lower expense ratios than actively managed funds. Gross expense ratios usually range from 0% to 3%. Below are two examples.

The AB Large Cap Growth Fund

The AB Large Cap Growth Fund is an actively managed fund with a gross expense ratio of 0.65% and a net expense ratio of 0.64% for the Class A shares, as of September 2020. The fund currently has a fee waiver and expense reimbursement of 0.01%. Management fees for the fund are 0.51%. The fund invests primarily in large-cap U.S. stocks with high growth potential. It typically includes 50 to 70 holdings.

The T. Rowe Price Equity Index 500 Fund

The T. Rowe Price Equity Index 500 Fund is a passive fund. It seeks to replicate the S&P 500 Index. As of September 2020, it has some contractual fee waivers in place. Its gross expense ratio is 0.19%, and its net expense ratio is also 0.19%.