Operating expenses are regular and recurring expenses that are incurred by all investment funds and paid out of investment fund assets, generally as a percentage of its net asset value (NAV). They can vary greatly from fund to fund.
A management fee is an asset-based fee paid by investment funds to the investment adviser for portfolio management. It includes any other fees payable to the fund’s investment adviser not included in other expenses.
The asset-based fee paid by mutual funds and ETFs as well as closed-end funds to brokers and others as compensation for the ongoing cost of marketing and selling fund shares and related services is the distribution fee. It is the 12b-1 fee charged by US funds, capped by the SEC at 1% of fund assets.
If not included in distribution fees, the shareholder service fee is paid by mutual funds and ETFs to those who respond to investor inquiries and provide investors with information about the fund. If paid outside of 12b-1 fees, it is included in other expenses.
Other expenses are those costs charges paid out of investment fund assets that are not already included in any another fee and charged to the investment fund. These include custodial fees, transfer agency fees, legal fees, accountant fees, other administrative expenses and, in the case of closed-end funds, interest expense.
Total annual fund operating expenses is the total of a fund’s annual operating expenses expressed as a percentage of the fund’s average net assets. The expense ratio is used to help investors compare alternative mutual funds and ETFs.
|Fund Expenses (Example)|
|Expense Ratio (Gross) 5/1/2020||0.98%|
|Expense Ratio (Net) 5/1/2020||0.98%|
|Distribution and/or service fee (12b-1) Fees||0.25%|
The fees and expenses of investment funds are disclosed in the fee table of a fund's prospectus. All investment funds must offer their shares under the terms of a prospectus, which must be delivered to all prospective investors upon request.
Where two funds are otherwise the same, the one with lower fees will outperform a fund with higher fees. The higher the fees and expenses, the less money remains invested in the fund.