Expense ratios

Expense Ratios
The annual expense ratio represents recurring management fees as a percentage of a mutual fund's assets. It shows what it costs the investment firm to operate the fund. The expense ratio represents the percentage of the fund's assets that go purely toward the expense of the daily operation of the fund. The fund's expense ratio is taken out of the fund's assets and lower its return to investors. An expense ratio of 0.5% per annum means that each year 0.5% of the fund's total assets will be used to cover expenses.

The major parts of the expense ratio are the management fee and the administrative cost.


 * The investment advisory fee or management fee is the money used to pay the manager of the mutual fund.
 * Administrative costs are the costs of recordkeeping, mailings, maintaining a customer service line, etc. These are costs that all funds have, but they vary in size from fund to fund.

There are different kinds of expense ratios that investors should watch out for.
 * Prospectus Gross Expense Ratio - Gross Expense Ratio represents the total gross expenses (net expenses with waivers added back in) divided by the fund's average net assets. If it is not equal to the net expense ratio, the gross expense ratio portrays the fund's expenses had the fund not waived a portion, or all, of its fees. Thus, to some degree, it is an indication of fee contracts. Some fee waivers have an expiration date; other waivers are in place indefinitely.


 * Prospectus Net Expense Ratio - The percentage of fund assets used to pay for operating expenses and management fees, including 12b-1 fees, administrative fees, and all other asset-based costs incurred by the fund, except brokerage costs. Fund expenses are reflected in the fund's NAV. Sales charges are not included in the expense ratio. The expense ratio for fund of funds is the aggregate expense ratio as defined as the sum of the wrap or sponsor fees plus the estimated weighted average of the underlying fund fees.


 * Audited Net Expense Ratio - The percentage of fund assets paid for operating expenses and management fees, including 12b-1 fees, administrative fees, and all other asset-based costs incurred by the fund, except brokerage costs. Fund expenses are reflected in the fund?s NAV . This expense ratio is pulled directly from the fund's annual report. Sales charges are not included in the expense ratio. For fund of funds, the underlying fund expense ratios are not included in the expense ratio.

The article What's in an expense ratio by the Fiduciary blog arm of Investment News explains the differences between these expense ratios.

The table in the article sums up the best as to where to look for the different expense ratios.