How are mutual funds fees calculated if the year is negative?

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CodeMaster
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How are mutual funds fees calculated if the year is negative?

Post by CodeMaster » Sat May 02, 2020 5:03 pm

How are mutual funds fees calculated if the year is negative?

For example if VITAX came back negative this year gains wise, how is the 0.10% fee applied? Is there any fees? :sharebeer :beer

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CAsage
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Re: How are mutual funds fees calculated if the year is negative?

Post by CAsage » Sat May 02, 2020 5:06 pm

Investment management fees for exchange traded funds (ETFs) and mutual funds are deducted by the ETF or fund company, and adjustments are made to the net asset value (NAV) of the fund on a daily basis. Investors don't see these fees on their statements because the fund company handles them in-house. I copied that from somewhere - so it has nothing to do with whether you make any money !
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Re: How are mutual funds fees calculated if the year is negative?

Post by kaneohe » Sat May 02, 2020 5:06 pm

aren't the fees typically on assets, not gains? so they always win; and sometimes you do.

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CodeMaster
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Re: How are mutual funds fees calculated if the year is negative?

Post by CodeMaster » Sat May 02, 2020 5:09 pm

so your saying if you have a balance of 100k in there, they take 0.10% of it every year done on a daily basis spread out ? 0.10% / 365 days for daily fee calculation?

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Re: How are mutual funds fees calculated if the year is negative?

Post by fabdog » Sat May 02, 2020 5:19 pm

Yes. The fees are deducted from assets... so if your balance goes down, you pay less in total fees, but not a lesser percentage of your assets

Mike

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CodeMaster
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Re: How are mutual funds fees calculated if the year is negative?

Post by CodeMaster » Sat May 02, 2020 5:22 pm

Interesting, so it has nothing to do with gains or losses but total balance. Wow thats quite a fee! lol
Thanks for that clarity :sharebeer

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Re: How are mutual funds fees calculated if the year is negative?

Post by ralph124cf » Sat May 02, 2020 5:37 pm

CodeMaster wrote:
Sat May 02, 2020 5:09 pm
so your saying if you have a balance of 100k in there, they take 0.10% of it every year done on a daily basis spread out ? 0.10% / 365 days for daily fee calculation?
Short answer, yes.

Slightly longer answer, your balance fluctuates daily, so the amount you pay varies daily.

Longer answer still, the ER is calculated in arrears. The majority of costs are fixed costs known in advance, such as office rent, utilities, clerk salaries, postage and printing costs for required mailings. Many costs vary with the number of customers, such as the postage and printing. Very few costs follow the price of the basket of stocks that are held. If the price of the stocks goes up by a factor of 10, with no other changes in the mutual funds business, then it would be reasonable to expect the ER to come down. This would probably happen at Vanguard, but not at a for profit mutual fund. Then it would probably go to management bonuses.

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Re: How are mutual funds fees calculated if the year is negative?

Post by Slowtraveler » Sat May 02, 2020 6:27 pm

They're calculated as a percentage of assets, gain normally is besides the point.

They're deducted from dividends or interest in most cases, in my experience.

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Re: How are mutual funds fees calculated if the year is negative?

Post by Phineas J. Whoopee » Sat May 02, 2020 7:42 pm

On the other hand, hedge funds in the US normally charge two percent of assets, plus twenty percent of return. The manager's income is tax advantaged. If the return is negative they don't have to hand over twenty percent of the loss as a positive payment to their clients.

It's an asymmetrical structure.

Low-cost retail mutual index funds could be much worse than they are.

Only accredited investors, who are presumed to be able to evaluate the risks and the fees, are allowed by regulation to invest in hedge funds. I am able, and therefore would choose not to.

PJW
Last edited by Phineas J. Whoopee on Sat May 02, 2020 8:50 pm, edited 1 time in total.

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Re: How are mutual funds fees calculated if the year is negative?

Post by Phineas J. Whoopee » Sat May 02, 2020 7:45 pm

Slowtraveler wrote:
Sat May 02, 2020 6:27 pm
They're calculated as a percentage of assets, gain normally is besides the point.

They're deducted from dividends or interest in most cases, in my experience.
The expense ratio is deducted daily, when capital markets are open, from the net asset value.

PJW

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Re: How are mutual funds fees calculated if the year is negative?

Post by bertilak » Sun May 03, 2020 8:27 am

CodeMaster wrote:
Sat May 02, 2020 5:22 pm
Interesting, so it has nothing to do with gains or losses but total balance. Wow thats quite a fee! lol
And that's why a seemingly small difference in expense ratios is really a very big difference.

Going from 1% to 2% is not a 1% difference but 100% (doubled). That's pretty significant even before taking into account year to year compounding.
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Re: How are mutual funds fees calculated if the year is negative?

Post by grabiner » Sun May 03, 2020 10:25 am

Phineas J. Whoopee wrote:
Sat May 02, 2020 7:45 pm
Slowtraveler wrote:
Sat May 02, 2020 6:27 pm
They're calculated as a percentage of assets, gain normally is besides the point.

They're deducted from dividends or interest in most cases, in my experience.
The expense ratio is deducted daily, when capital markets are open, from the net asset value.
But the payment is deducted from dividends. If a mutual fund holds stocks or bonds which pay a 2% dividend, and has 1% annual expenses, the dividend payment to investors will only be 1% of the fund value. (This has a tax advantage, as you only pay tax on the 1%).

You can see this effect with funds that have multiple share classes. Investor and Admiral shares of Vanguard funds pay dividends on the same day, but the Admiral dividend is slightly larger (as a raw dollar amount if the share prices are the same, and always as a percentage of NAV).
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Re: How are mutual funds fees calculated if the year is negative?

Post by Vanguard Fan 1367 » Sun May 03, 2020 12:59 pm

CodeMaster wrote:
Sat May 02, 2020 5:22 pm
Interesting, so it has nothing to do with gains or losses but total balance. Wow thats quite a fee! lol
Thanks for that clarity :sharebeer
My friends and loved ones at some of the investment advisor places are really paying quite a fee with a 1 plus percent Assets under Management Fee and perhaps another 1 percent of the "total balance" fee for an expense ratio on their mutual funds. They also get to pay a load to get into the fund.

I am grateful for Vanguard's Total Stock Market and S & P 500 ETF's with their .03% fee. I am glad they can keep the business open taking so little from me.
Upton Sinclair: "It is difficult to get a man to understand something when his salary depends on his not understanding it."

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Re: How are mutual funds fees calculated if the year is negative?

Post by alex_686 » Sun May 03, 2020 9:24 pm

Phineas J. Whoopee wrote:
Sat May 02, 2020 7:42 pm
On the other hand, hedge funds in the US normally charge two percent of assets, plus twenty percent of return.
Note, they get 20% over the hurdle rate. Many use a risk-adjusted large cap index. Plus 2 & 20 is more aspirational. In recent years it has been closer to 1 & 10.

To the OP, you kind if want fees to be based on assets. Most if the expenses are going towards operational stuff. In a down year do you really want your manager to load up on risk, hoping to catch up? Or do you want them to slash the accounting and compliance department? Portfolio Managers do get a bonus similar to that of hedge funds, some kind of risk adjusted metric. But even a million dollar payout is not going move the expense ratio much.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.

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Re: How are mutual funds fees calculated if the year is negative?

Post by abuss368 » Fri May 08, 2020 12:52 pm

grabiner wrote:
Sun May 03, 2020 10:25 am
Phineas J. Whoopee wrote:
Sat May 02, 2020 7:45 pm
Slowtraveler wrote:
Sat May 02, 2020 6:27 pm
They're calculated as a percentage of assets, gain normally is besides the point.

They're deducted from dividends or interest in most cases, in my experience.
The expense ratio is deducted daily, when capital markets are open, from the net asset value.
But the payment is deducted from dividends. If a mutual fund holds stocks or bonds which pay a 2% dividend, and has 1% annual expenses, the dividend payment to investors will only be 1% of the fund value. (This has a tax advantage, as you only pay tax on the 1%).

You can see this effect with funds that have multiple share classes. Investor and Admiral shares of Vanguard funds pay dividends on the same day, but the Admiral dividend is slightly larger (as a raw dollar amount if the share prices are the same, and always as a percentage of NAV).
This was my understanding as well. The fund receives dividends through out the year from the companies the fund holds. The cash available to investors of the fund is reduced for operating expenses. The remaining cash is paid to fund investors as a dividend.

Always follow the cash!
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Re: How are mutual funds fees calculated if the year is negative?

Post by crefwatch » Fri May 08, 2020 1:39 pm

CodeMaster wrote:
Sat May 02, 2020 5:22 pm
Interesting, so it has nothing to do with gains or losses but total balance. Wow thats quite a fee! lol
Well, 0.10% may be high for a competitive, simple index ETF. But it's on the low side for any kind of fund with the slightest amount of complexity. I consider 0.10% to be a bargain, as Expense Ratios go.

CodeMaster, you may want to get used to reading at least the Summary version of your fund prospectuses. I consider Fidelity to be a higher-cost provider than Vanguard. But FXNAX, a decent US Bond (Open End, not ETF) fund, has this, near the beginning of its Summary Prospectus. I boldfaced one line:

Annual Operating Expenses
(expenses that you pay each year as a % of the value of your investment)

Management fee 0.025%
Distribution and/or Service (12b-1) fees None
Other expenses 0.000%
Total annual operating expenses 0.025%

This is not the place to go into it, but there are other expenses you can't see in the Prospectus, like brokerage commissions and fees.

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Re: How are mutual funds fees calculated if the year is negative?

Post by alex_686 » Mon May 11, 2020 11:09 am

abuss368 wrote:
Fri May 08, 2020 12:52 pm
grabiner wrote:
Sun May 03, 2020 10:25 am
Phineas J. Whoopee wrote:
Sat May 02, 2020 7:45 pm
Slowtraveler wrote:
Sat May 02, 2020 6:27 pm
They're calculated as a percentage of assets, gain normally is besides the point.

They're deducted from dividends or interest in most cases, in my experience.
The expense ratio is deducted daily, when capital markets are open, from the net asset value.
But the payment is deducted from dividends. If a mutual fund holds stocks or bonds which pay a 2% dividend, and has 1% annual expenses, the dividend payment to investors will only be 1% of the fund value. (This has a tax advantage, as you only pay tax on the 1%).

You can see this effect with funds that have multiple share classes. Investor and Admiral shares of Vanguard funds pay dividends on the same day, but the Admiral dividend is slightly larger (as a raw dollar amount if the share prices are the same, and always as a percentage of NAV).
This was my understanding as well. The fund receives dividends through out the year from the companies the fund holds. The cash available to investors of the fund is reduced for operating expenses. The remaining cash is paid to fund investors as a dividend.

Always follow the cash!
Former mutual fund accountant here. This is off on multiple points.

Expenses are estimated, and are accrued as a liability daily. There is no cash flow here.

Cashflows to meet actual expenses are erratic. When cash is needed for expenses, assets are sold for the cash. Note, this does not change NAV. Assets are liabilities are reduced by the same amount.

Dividends received are accrued on ex-div date as income. There is no cash flow here. That comes latter when dividends com in. It is common for stocks to go ex-div on December, but not paid out for weeks to month. That is, dividend distributions for tax year 2020 might be tied to cashflow in 2021.

Dividend distributions are to create "reportable transactions" to the IRS so they can see if you are paying your taxes. There may or may not be cash flows associated with this.

Since the reason for dividends to exist is to generate "reportable transactions", only net income is distributed. i.e., Gross income (i.e. dividends) less expenses. Normally, the "complex" income is reduced first. That is, you apply this to the non-qualified dividends first.

Dividends received (i.e, the actual cash from a dividend) are immediately reinvested into the portfolio.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.

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Re: How are mutual funds fees calculated if the year is negative?

Post by abuss368 » Mon May 11, 2020 11:20 am

alex_686 wrote:
Mon May 11, 2020 11:09 am
abuss368 wrote:
Fri May 08, 2020 12:52 pm
grabiner wrote:
Sun May 03, 2020 10:25 am
Phineas J. Whoopee wrote:
Sat May 02, 2020 7:45 pm
Slowtraveler wrote:
Sat May 02, 2020 6:27 pm
They're calculated as a percentage of assets, gain normally is besides the point.

They're deducted from dividends or interest in most cases, in my experience.
The expense ratio is deducted daily, when capital markets are open, from the net asset value.
But the payment is deducted from dividends. If a mutual fund holds stocks or bonds which pay a 2% dividend, and has 1% annual expenses, the dividend payment to investors will only be 1% of the fund value. (This has a tax advantage, as you only pay tax on the 1%).

You can see this effect with funds that have multiple share classes. Investor and Admiral shares of Vanguard funds pay dividends on the same day, but the Admiral dividend is slightly larger (as a raw dollar amount if the share prices are the same, and always as a percentage of NAV).
This was my understanding as well. The fund receives dividends through out the year from the companies the fund holds. The cash available to investors of the fund is reduced for operating expenses. The remaining cash is paid to fund investors as a dividend.

Always follow the cash!
Former mutual fund accountant here. This is off on multiple points.

Expenses are estimated, and are accrued as a liability daily. There is no cash flow here.

Cashflows to meet actual expenses are erratic. When cash is needed for expenses, assets are sold for the cash. Note, this does not change NAV. Assets are liabilities are reduced by the same amount.

Dividends received are accrued on ex-div date as income. There is no cash flow here. That comes latter when dividends com in. It is common for stocks to go ex-div on December, but not paid out for weeks to month. That is, dividend distributions for tax year 2020 might be tied to cashflow in 2021.

Dividend distributions are to create "reportable transactions" to the IRS so they can see if you are paying your taxes. There may or may not be cash flows associated with this.

Since the reason for dividends to exist is to generate "reportable transactions", only net income is distributed. i.e., Gross income (i.e. dividends) less expenses. Normally, the "complex" income is reduced first. That is, you apply this to the non-qualified dividends first.

Dividends received (i.e, the actual cash from a dividend) are immediately reinvested into the portfolio.
Thanks as that really explains it much better and I certainly learned a lot! Is this why one can read a Vanguard (or other fund report) and notice in the fine print, that Total Stock Index for example has an expense ratio of 0.04 but is presently running a 0.03 expense ratio to date. It is an estimate and the fund has not yet lowered the expense ratio.
John C. Bogle: Two Fund Portfolio - Total Stock & Total Bond - “Simplicity is the master key to financial success."

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Re: How are mutual funds fees calculated if the year is negative?

Post by alex_686 » Mon May 11, 2020 12:13 pm

abuss368 wrote:
Mon May 11, 2020 11:20 am
Thanks as that really explains it much better and I certainly learned a lot! Is this why one can read a Vanguard (or other fund report) and notice in the fine print, that Total Stock Index for example has an expense ratio of 0.04 but is presently running a 0.03 expense ratio to date. It is an estimate and the fund has not yet lowered the expense ratio.
You will have to point me to exactly what you are looking at but my guess would be no.

Adjusting the expense ratio is a big thing. That number is in the prospectus. If you change that number you have to update the prospectus and get that corrected information out. I have seen accountants sent off the basement with reams of paper and staplers to update the physical prospectus when we made a error.

I have 3 guesses.

First, I would guess that there is a mismatch between the reporting sources. One is current, the other is using stale data.

My second guess is you are seeing the difference between the gross expense ratio (the one actually in the prospectus) and the net expense ratio. A fund can waive certain expenses "temporally". During the 2008 crisis, when short term rates where zero, funds waived their expenses for years. Disclosures are lower here. And I know that I cam contradicting myself here a bit. But I am assuming you are talking about the Gross Expense Ratio - that that the one that is nearly impossible to change.

My third guess is that this is a rounding issue. Or maybe a calculation issue, depending on how your source calculated the expense ratio. I have seen how choosing different dates can affect expense ratios. 2020 is a leap year, so a extra days worth of expense. I have seen issues when the accountant used the last business day verse the last calendar day. i.e., Friday 12/29 verse Sunday 12/31.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.

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