Total Expense Ratio
Encyclopedia
The total expense ratio, or TER, is a measure of the total cost of a fund to the investor. Total costs may include various fees (purchase, redemption, auditing) and other expenses. The TER is calculated by dividing the total annual cost by the fund's total assets averaged over that year, and is denoted as a percentage. It will normally vary somewhat from year to year.
Typically it consists of the annual management charge or AMC (the fee that the fund company charges annually to manage the fund, typically commission paid to fund managers) plus 'other' charges incurred with running the fund. These other charges can consist of share registration fees, fees payable to auditors, legal fees, and custodian fees. Not included in the total expense ratio are transaction costs as a result of trading of the fund's assets and performance fees.
Because the TER is inclusive of these other charges, it is a more accurate measure of the 'drag' on a fund's performance than just using the annual management charge alone. In their advertisements and even their factsheets, Fund companies tend to give more emphasis to the AMC and to make it difficult for a private investor (in the UK at least) to see the total expense ratio of the fund they are investigating. In the United States however, it is mandatory not only to show it but also to make it as clear and as concise as possible.
Typically it consists of the annual management charge or AMC (the fee that the fund company charges annually to manage the fund, typically commission paid to fund managers) plus 'other' charges incurred with running the fund. These other charges can consist of share registration fees, fees payable to auditors, legal fees, and custodian fees. Not included in the total expense ratio are transaction costs as a result of trading of the fund's assets and performance fees.
Because the TER is inclusive of these other charges, it is a more accurate measure of the 'drag' on a fund's performance than just using the annual management charge alone. In their advertisements and even their factsheets, Fund companies tend to give more emphasis to the AMC and to make it difficult for a private investor (in the UK at least) to see the total expense ratio of the fund they are investigating. In the United States however, it is mandatory not only to show it but also to make it as clear and as concise as possible.