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An expense ratio is the cost of owning a mutual fund or ETF. Think of the expense ratio as the management fee paid to the fund company for the benefit of owning the fund.
One notable component of the expense ratio of U.S. funds is the "12b-1 fee", which represents expenses used for advertising and promotion of the fund. 12b-1 fees are paid by the fund out of mutual fund assets and are generally limited to a maximum of 1.00% per year (.75% distribution and .25% shareholder servicing) under FINRA Rules. [7]
So mutual funds are quite a bit more expensive than ETFs, comparing their respective averages. For example, in 2022 an average mutual fund (asset-weighted) would cost 0.44 percent of your assets ...
A mutual fund is a pooled collection of investment funds. When you buy shares in a mutual fund, your money is combined with other investors' money. A professional fund manager uses the capital to...
The fund's board reviews the management fee annually. Fund shareholders must vote on any proposed increase, but the fund manager or sponsor can agree to waive some or all of the management fees in order to lower the fund's expense ratio. Index funds generally charge a lower management fee than actively-managed funds.
The total expense ratio (TER) is a measure of the total cost of a fund to an investor. Total costs may include various fees (purchase, redemption, auditing) and other expenses. The TER, calculated by dividing the total annual cost by the fund's total assets averaged over that year, is denoted as a percentage. It will normally vary somewhat from ...
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