Management expense ratio

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The management expense ratio (MER) is the percentage of a mutual fund’s or exchange-traded fund's (ETFs) average net assets paid out of the fund each year to cover the day-to-day and fixed costs of managing the fund. The management expense ratio is different than the management fee, although they tend to be incorrectly used interchangeably.

Specifically, the MER of mutual funds represents the combined costs of two main services: the management fee for investment management services provided to the fund and its investors by the fund company; and financial advice and planning services provided by the investor’s advisor. Management fees comprise approximately 40 percent of the total MER, while the dealer advisor compensation (also known as trailer fees) comprises another 40 percent. The fund company’s administrative costs--including legal and accounting fees, brokerage fees and interest expenses--as well as HST/GST costs comprise the remaining 20 percent of MER fees.[1]

Mutual fund MERs range from less than one per cent per year (usually for certain low risk investments such as some money market funds) to more than three per cent (usually involving equity funds primarily comprising Canadian and international stocks).[2] The MER of ETFs and index funds is typically much lower than those of actively managed funds.[3]

Management fees

Management fees are the costs for investment management services provided to the fund.

Typical mutual fund management fee[1]
Asset class Median fee Average fee (asset-weighted)
Money market 1.00 0.89
Fixed income 1.50 1.38
Balanced 1.95 1.82
Equity 2.00 1.91

Typical MERs

Canadian equity ETFs have an average MER of 0.34%[4] and several have MERs of less than 0.1%. The asset-weighted expense ratios of actively managed mutual funds, index funds and ETFs in Canada were as follows as of December 2013[3]:

Active funds Index funds ETFs
Canadian equity 2.25 0.86 0.22
US equity 2.13 0.85 0.33
International equity 1.97 0.84 0.50
Fixed income 1.29 0.85 0.32

Effects of expenses over time

As compounding interest adds exponentially to the value of an investment, the impacts of fund expenses subtract exponentially.

For example, reducing the MER by 1% can increase the length of your retirement by 10 years.[note 1]

Reducing expense ratios by 1% per annum over lifetime
Annual Return - Fee Impact.png

The graph also shows the impacts of delaying contributions to your portfolio. You'll need to contribute a higher amount to make up for the lost time.

Administrative costs

Taxes

References

Notes

  1. Results are simulated. The saving phase simulates a participant with a salary of $45,000 at age 25, linearly increasing to $85,000 by age 65, making yearly contributions of 6% of salary at age 25, increasing by 0.5% per year to a maximum of 10% and with a 50% company matching contribution up to the first 6% of salary. In retirement, $63,750 (75% of final salary) is deducted at the beginning of each year. The blue-shaded area shows ending savings with an after cost investment return of 9% assumed at age 25, linearly decreasing to 6% at age 80 and remaining constant thereafter. Inflation is assumed to be a constant 3%. The tan-shaded area assumes 1% greater return each year due to reducing the costs of investment by 1%. All amounts are in present-day dollars. Source: AllianceBernstein, Target-Date Retirement Funds: A Blueprint for Effective Portfolio Construction, as presented to the DOL/SEC Hearing On Target Date Funds And Similar Investment Options, October 2005.

Further reading

External links

Bogleheads forum discussions