If you own a mutual fund, index fund or exchange traded fund (ETF) then you pay a fee called the management expense ratio (MER) or “expense ratio”. This money goes to pay for the cost of running the fund. It’s important to note that this fee is not directly charged to the investor but rather to the fund itself. It will never appear on any transaction order form or account statement.
Why do I care about the MER?
The fees charged to the funds you own will reduce the return you get. For example if you have a mutual fund that got 7% last year and then charged a 1% fee, then the return you will see is 6% – a 1% difference makes a huge difference over a number of years. Generally speaking, the lower the fees are, the better off the investors are since they get to keep more of their own money.
Know your fees
It is the responsibility of the investor to know what kind of fees they are being charged. If you have an advisor you can ask them or you can just look it up yourself. Make sure you do this!
You should be able to go to the website of whatever company’s funds you own to look up the MER or you can go to a site like Morningstar.com which contains this information for all mutual funds.
Index funds typically have lower MERs than managed mutual funds because they don’t have to pay the portfolio managers as much. ETFs can be cheaper than index funds. Vanguard charges MERs that are among the cheapest in the industry.
Some examples
Here are some ETFs and funds and their MERs (the trading symbols are in brackets):
- Vanguard Total Stock Market Index (VTSMX) – MER = 0.15%
- Vanguard Total Stock Market ETF (VTI) – MER = 0.07%
- Aim Large Cap Growth Inv (LCGIX) – MER = 1.24%
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I always say you should control what you can and the expense ratio is one of them.
Good point Jim – I agree.
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