What Does the Gross Expense Ratio Mean, and Why Use It?

Key Takeaways:

• GER is the annual cost for a mutual fund or ETF or the portion of assets used for fund operation.
• It includes fee waivers or expense reimbursements but excludes sales or brokerage commissions not directly imposed on the fund.
• It’s different from the net expense ratio. The net expense ratio includes management fees, administrative expenses, and other costs, but not fee waivers or expense reimbursements.

Have you ever thought about what the gross expense ratio means? Why do numerous professional individuals use it so frequently? Firstly, in investing, knowing where your money goes is essential. 

When exploring mutual funds or exchange-traded funds ETFs, you’ll encounter two expense ratios: gross and net. Let’s dive into the differences between these ratios to understand their impact on your investments.

In further text, we’ll focus on explaining the gross expense ratio and why it is crucial to understand and use it! 

Gross expense ratio definition and explanation

The GER denotes the segment of a portfolio holding dedicated to overseeing fund operations. This measure encompasses any exemptions or reimbursements of fees currently applicable.

Nonetheless, it excludes transaction fees that are not directly imposed on the fund but would affect the net expense ratio.

Understanding Annual GER and report expense ratios:

Known as the verified gross expense ratio, information providers like Morningstar extract the yearly GER from the mutual fund’s audited annual report.

This report displays the fees paid over a year. Conversely, prospectus expense ratios elucidate significant expense changes for the current period.

How does the GER function?

The gross expense ratio is a crucial indicator for investors, revealing the total fund management fees, including buying and selling costs. 

These charges are significant as they directly affect the net return received by investors over the long term. 

Funds under active management generally experience elevated expense ratios in contrast to the norm. 

It’s imperative for investors to discern the criteria defining a favorable expense ratio and to juxtapose the gross expense ratio with the net expense ratio to comprehend the differences. 

What may funds establish in certain cases?

GER is the annual cost for a mutual fund or ETF or the portion of assets used for fund operation. Sometimes, funds can choose not to charge or give back some of their fees, especially with new funds. 

This can result in a lower net expense ratio, providing investors with a more favourable investment opportunity.

What is a good gross expense ratio like?

A good illustration of the GER is when a fund shows a net expense ratio of 2% along with a gross expense ratio of 3%. 

This indicates that 1% of the fund’s assets were utilized for fee waivers, expense reimbursements, or other rebates not factored into the net expense ratio. 

It’s crucial because these rebates and reimbursements may or may not persist in the future. It’s wise for investors to assess both expense ratios and compare them with similar funds before making investment decisions.

Examples of Gross Expense Ratios

Generally, like index funds, passively managed funds usually include lower expense ratios than actively managed funds. Gross expense ratios typically vary from 0% to 3%. Here are two instances.

What is the AB Large Cap Growth Fund?

Reported in September 2020, the actively managed AB Large Cap Growth Fund, overseen by its fund managers, presents a net expense ratio of 0.64% and a GER of 0.65% for its Class A shares.

The fund enjoys a fee waiver and expense reimbursement totalling 0.01%, including 12b-1 fees. Management fees for the fund stand at 0.51%, contributing to the fund’s expense ratio.

This fund primarily focuses on high-growth potential large-cap U.S. stocks, typically maintaining a portfolio comprising 50 to 70 holdings.

The T. Rowe Price Equity Index 500 Fund – Explained

In contrast to the actively managed AB Large Cap Growth Fund, the T. Rowe Price Equity Index 500 Fund operates as a passive investment vehicle, aiming to replicate the performance of the S&P 500 Index. 

As of September 2020, the fund benefits from certain contractual fee waivers, resulting in its gross and net expense ratios being 0.19%, contributing to its expense ratio.

Net vs GER comparison

A fund’s expense ratio, the percentage of your investment allocated to fees, comprises the gross and net expense ratios. The GER encompasses all charges, such as management, administrative, and advertising fees, known as 12b-1 fees. 

In contrast, the net expense ratio reflects the actual fees after any discounts or waivers, considering the fund’s net assets and their influence on investment returns.

Typically, the gross and net expense ratios align. However, while the net expense ratio indicates your actual payment, it’s crucial to note that fee waivers are often temporary and commonly employed to attract interest in new funds. 

Since the GER signifies the potential payment, monitoring both figures is essential.

How to find the expense ratio?

Divide management fees by the fund’s investment to find the expense ratio. This figure is usually provided on the fund’s fact sheet. For example, a 1% expense ratio means paying $10 in fees for every $1,000 invested. 

If a fund has a 1% gross expense ratio and a 0.75% net expense ratio, it indicates that 0.25% of the fund’s assets are allocated to fee reimbursements, waivers, and discounts.

What is the gross expense ratio 401k?

Determining an ideal gross expense ratio for a 401(k) isn’t more complicated, as it varies depending on the plan. 

However, considering the investment costs and the plan’s expenses, a total expense ratio of around 1.0% to 1.50% should generally be reasonable.

Bottom line

Understanding the gross expense ratio is crucial for investors, as it reveals the total fees a fund charges for managing investments. By comprehending this metric, investors can make informed decisions about their portfolios. 

With typical expense ratios ranging from 0% to 3%, assessing both gross and net expense ratios is important to gauge the true investment cost.