The expense ratio of a stock or asset fund is the total percentage of fund assets used for administrative, management, advertising (12b-1), and all other expenses. An expense ratio of 1% per annum means that each year 1% of the fund's total assets will be used to cover expenses. The expense ratio does not include sales loads or brokerage commissions.
Expense ratios are important to consider when choosing a fund, as they can significantly affect returns. Factors influencing the expense ratio include the size of the fund (small funds often have higher ratios as they spread expenses among a smaller number of investors), sales charges, and the management style of the fund. A typical annual expense ratio for a U.S. domestic stock fund is about 1%, although some passively managed funds (such as index funds) have significantly lower ratios: for example, the Vanguard US Large Cap ETF has an expense ratio of 0.07%.
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 generally limited to a maximum of 1.00% per year (.75% distribution and .25% shareholder servicing) under Financial Industry Regulatory Authority Rules.
Other articles related to "expense ratio, expenses":
... The expense ratio allows investors to compare expenses across funds ... The expense ratio equals the 12b-1 fee plus the management fee plus the other fund expenses divided by average net assets ... The expense ratio is sometimes referred to as the "total expense ratio" or TER ...
... Investors in a mutual fund pay the fund's expenses ... These expenses fall into five categories distribution charges (sales loads and 12b-1 fees), the management fee, other fund expenses, shareholder transaction fees and ... Some of these expenses reduce the value of an investor's account others are paid by the fund and reduce net asset value ...
... but adequate to explain the effect of expenses ... In an equity fund where the historical gross return might be 10%, a 1% expense ratio will consume approximately 10% of the investor's return ... In a bond fund where the historical gross return might be 8%, a 1% expense ratio will consume approximately 12.5% of the investor's return ...
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