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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.

Expense Ratio

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.

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