What is the Gross Expense Ratio (GER)?
A mutual fund’s gross expense ratio (GER) measures the percentage of assets allocated to fund management. The gross expense ratio comprises fee waivers and expenditure reimbursements. It excludes sales and brokerage charges that the fund’s net cost ratio would include.
Morningstar extracts the fund’s audited annual report’s gross expense ratio. While annual-report expense ratios show actual fees incurred throughout a fiscal year, prospectus ratios show significant changes to the expenditure structure for the current quarter.
How GER Works
The gross expense ratio is crucial for investors to understand all the expenses associated with fund management. These costs influence the fund’s net return and investor returns. If fees are excessive, the fund’s net return after fees suffers.
The advent of competing exchange-traded funds (ETFs) has raised questions about mutual funds’ GER. The fund gross expense ratio comprises management, 12B-1, administrative, and operational fees. Investors should examine a fund’s gross and net expense ratios to understand the differences.
Some funds include fee waivers, reimbursements, or recoupment agreements. This is typical for new funds. An investment business and its management may eliminate fees after launching a new fund to reduce investor expenses. The net expense ratio shows fund fees after waivers, reimbursements, and recoupments. These charge reductions usually last a set time before the fund must pay the total price.
A fund with a net expense ratio of 2% and a gross expense ratio of 3% has utilized 1% of its assets for fees, reimbursements, or rebates not included in the net expense ratio. Rebates and reimbursements may end; therefore, this is crucial. Prudent investors should compare fee ratios to similar funds before investing.
Gross-Expense Analysis Examples
Index and other passively managed funds have lower cost ratios than actively managed funds. Gross expenditure ratios are usually 0%–3%. Two instances follow.
AB Large Cap Growth Fund
As of September 2020, the actively managed AB Large Cap Growth Fund has a gross expense ratio of 0.65% and a net expense ratio of 0.64% for Class A shares. The fund waives fees and reimburses expenses at 0.01%. Management costs for the fund are 0.51%.1The fund focuses on high-growth, large-cap U.S. equities. It usually has 50–70 holdings.
Trowe Price Equity Index 500 Fund
The T. Rowe Price Equity Index 500 Fund might be considered passive. To duplicate the S&P 500 Index. Some contractual fee waivers apply as of September 2020. Both its gross and net expense ratios are 0.19%.
Conclusion
- The gross expense ratio (GER) is the annual cost of investing in a mutual fund or ETF, or the fraction of assets used for operating.
- GER excludes sales or brokerage commissions not made directly to the fund, but fee waivers and expenditure reimbursements are.
- The net expense ratio considers management fees, administrative expenditures, and other costs but excludes fee waivers and reimbursements.
