Expense Ratio Information

Prospectus Net Expense Ratio vs. Audited Net Expense Ratio

The difference between Prospectus Net and Audited Net can be explained by a difference in time periods. The Audited Net is the audited fee charged during the previous fiscal year for the fund.  It can be considered a “backward-looking” number. The Prospectus Net is a “forward-looking” number and is the anticipated expense the fund company plans to charge for the upcoming fiscal year.  If the numbers are different, a comparison of the two can be conducted to see if the fund company anticipates an increase or decrease in fees charged.  Both numbers include the 12b-1 fee and other management fee or administrative costs for the fund.  They do not include any sales or transaction charges.

For fund of funds, the Audited Net and Prospectus Net will be different because two different numbers are being reported. The Audited Net will only report the wrap fee at the fund of fund level.  The Prospectus Net will report the wrap fee and the weighted average of the underlying fund expense ratios. 

Both numbers are net of any conditional waivers or temporary deductions in the expense ratios and this leads us to the second comparison.

Prospectus Net Expense Ratio vs. Prospectus Gross Expense Ratio

The difference between the two Prospectus ratios, Net and Gross, can be explained through conditional or contractual waivers or reimbursements the fund company may impose. The Prospectus Net will include the waivers or reimbursements, while the Prospectus Gross will exclude the waivers or reimbursements. 

You will typically see a waiver or reimbursement for funds with small asset bases.  For these funds, the actual fee that they are contracted to charge could be a significant percentage of the fund assets.  Therefore, they waive a percentage of the funds expenses to bring it into alignment with a “reasonable” number.  As the asset base of the fund grows, or if the contracted waiver period expires, the fund’s expenses could change. It’s important to check the fund prospectus to see if any waivers or reimbursements are in effect, and to see if this could change the expense ratio of the fund in the future.

In conclusion, no expense ratio is right for every application.  Consider the situation and intended use.  The following table may help.

 

Prospectus Net ER

Audited Net ER

Prospectus Gross ER

Data Source

Fund Prospectus

Audited Annual Report

Fund Prospectus

Time period considered

Upcoming fiscal year

Previous fiscal year

Upcoming fiscal year

12b-1 fees

Yes

Yes

Yes

Mgmt. fees

Yes

Yes

Yes

Admin./Asset-based fees

Yes

Yes

Yes

Sales/Trans. charges

No

No

No

Waivers/Reimbursements

Yes

Yes

No

 

 

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