What is Gross Expense Ratio ?
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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.
Definition
The Total Expense Ratio (TER) refers to the percentage of a fund's total assets that are used for operating the fund. It includes any fee waivers or reimbursements that may exist but excludes any sales charges or brokerage commissions not directly charged to the fund, which are accounted for in the net expense ratio. Sometimes referred to as the audited total expense ratio, data providers like Morningstar extract the annual TER from a fund's audited annual report.
Origin
The concept of the Total Expense Ratio originated in the investment fund industry as a way for investors to easily understand the operating costs of a fund. The earliest TERs can be traced back to the mid-20th century when the fund industry began standardizing its reporting methods to allow investors to better compare the costs of different funds.
Categories and Features
The Total Expense Ratio is typically divided into two categories: the annual report expense ratio and the prospectus expense ratio. The annual report expense ratio reflects the actual fees charged during a specific fiscal year, while the prospectus expense ratio reflects substantial changes in the fee structure for the current period. The main feature of the TER is that it provides a comprehensive view of a fund's cost-effectiveness, helping investors make more informed investment decisions.
Case Studies
Case Study 1: A large mutual fund disclosed a TER of 1.5% in its annual report, meaning that for every $100 invested, $1.50 is used to cover the fund's operating expenses. By analyzing this ratio, investors can assess the cost-effectiveness of the fund. Case Study 2: Another fund company updated its prospectus TER to 1.2%, reflecting adjustments in its fee structure to attract more investors.
Common Issues
Investors often confuse the Total Expense Ratio with the net expense ratio. The TER includes all operating expenses, while the net expense ratio excludes sales charges and brokerage commissions. Additionally, investors may overlook the impact of the TER on long-term investment returns, underestimating how high expense ratios can erode profits.
