Expense ratio

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- +On average the expense ratio of an index fund will be far lower than an actively managed mutual fund. The reason being that an index fund does not have high management expense fees like an actively managed fund has.

Revision as of 05:34, February 10, 2010

Expense ratio is the ratio of the expenses incurred by the management in order to run an Exchange Traded Fund (ETF) or a mutual fund divided the total assets held by the fund. In other words, it is the percentage of assets taken back by the management in order to run the fund.

Generally, the major expenses incurred by the fund are the management fees, which include mostly management fees and operating expenses, if any. Due to the fact that management fees take up bulk of the expenses, this ratio is also called the Management Expense Ratio. Another significant expense is the 12b-1 fees which is classified as marketing and promotion expenses under the FINRA rules. Other miscellaneous costs could be legal fees, auditing fees, accounting or recordkeeping and taxes, amongst others[1].


On average the expense ratio of an index fund will be far lower than an actively managed mutual fund. The reason being that an index fund does not have high management expense fees like an actively managed fund has.





References

  1. Investopedia
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