Fee paid by shareholders of a mutual fund or exchange-traded fund (ETF)
The management expense ratio (MER) – also referred to simply as the expense ratio – is the fee that must be paid by shareholders of a mutual fund or exchange-traded fund (ETF). The MER goes toward the total expenses used to run such funds. The fee is not transferred directly to the fund owner(s) but is allotted to the fund itself.
The management expense ratio is expressed as a percentage, reflecting the percentage of assets fee related to a fund’s investment portfolio.
Management Fees
The MER is also sometimes referred to as the management fee because the cost is largely created by the hiring and payment of the fund’s portfolio manager. The management fee is intended to cover the various expenses of a team of individuals who oversee, support, and manage the fund. Such expenses may include legal fees, accounting services, and other administrative costs.
The total percentage of the MER may depend on factors such as the size and success of the fund. The fee typically falls somewhere between 0.5% and 2% of the invested assets. The figure is taken from the final total of each fund’s assets under management (AUM). Because the majority of the MER is devoted to costs associated with the portfolio manager, the MER can vary significantly, depending on the experience, skill, and expertise of the fund’s manager.
In some cases, an additional trailing commission becomes part of the MER. The trailing commission is a continuous payment that is typically made to the advisory or investment firm responsible for selling the fund.
How to Calculate the Management Expense Ratio
The MER is, as noted above, calculated as a percentage of the total assets under management within the fund, which is otherwise known as the portfolio value. The calculation for determining the MER is as follows:
The MER total is then multiplied by 100 in order to convert it from a decimal figure to a percentage figure.
Example of the Management Expense Ratio
To better understand how MER is calculated, let’s take a look at an example.
For this example, the XYZ Mutual Fund manages a portfolio that is valued at $12,000,000 and with $175,000 in management costs and expenses. The MER would then be:
The management expense ratio is not a fee directly charged to investors. Rather, it is deducted from the fund’s net asset value (NAV). Investors are charged other fees associated with the fund – fees that are not part of the MER, and that are charged when an investor buys or sells their fund shares. The non-MER fees include items such as brokerage fees, exchange fees, and sales commissions.
Importance of the Management Expense Ratio
The MER is important because it significantly affects the return on investment generated by the fund. Take the example above: if Company XYZ Mutual Fund saw a return of 5% and then charged a 1.46% fee, then the actual net return for investors (minus any other non-MER fees) in the fund would be only 3.54%.
Over a period of time, the percentage reduction can result in a massive impact on the total dollar returns for investors. The lower the MER fee, the better off the fund’s investors are because the investment return generated is higher.
Key Takeaway
Understanding a fund’s MER is important. It shows the fund’s owners and investors how much is being spent on maintaining and managing the fund. It also reveals the percentage that will be deducted from the final percentage of earnings. The MER is vital information for any holder of shares in a fund portfolio, as well as for those who manage and sell the portfolio.
Additional Resources
CFI offers the Capital Markets & Securities Analyst (CMSA®)certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following CFI resources will be helpful:
FAQs
What is a management expense ratio (MER)? The MER is the combined costs of managing a fund including operating expenses and taxes. Mutual funds provide important benefits. And like all things that offer value, there's a cost associated with those benefits.
What is a good MER rate? ›
Investors should avoid mutual funds that charge 2% MER or more. A good MER starts around 1.25%, but a great MER is less than 1%. The best example is TD's e-Series funds where the average MER is around 0.40%.
What is a reasonable management expense ratio? ›
A number of factors determine whether an expense ratio is considered high or low. A good expense ratio, from the investor's viewpoint, is around 0.5% to 0.75% for an actively managed portfolio. An expense ratio greater than 1.5% is considered high.
Is management fee different from Mer? ›
A management fee is charged by an investment manager for managing the fund's assets, while the MER, typically called the expense ratio, represents the total cost of managing and operating a fund and is given as a percentage of the fund's total assets.
How do you calculate mer? ›
How to Calculate MER. For example, if your total sales in 2021 totaled $2.13m and your total marketing spend was $542,000, your MER for 2021 was 3.87 (or, expressed as a percentage, 387%).
What expense ratio is too high? ›
Typically, any expense ratio higher than one percent is high and should be avoided. Over an investing career, a low expense ratio could easily save you tens of thousands of dollars, if not more. And that's real money for you and your retirement.
What is considered a high management fee? ›
A general rule—often quoted by advisors and fund literature—is that investors should try not to pay any more than 1.5% for an equity fund. At the same time, small-cap funds usually have higher trading costs than large-cap funds.
Is 2 percent mer high? ›
A MER above 1.5% is usually considered high, and some MERs are higher than 3%.
How to avoid mer fees? ›
Thankfully, cheaper options than mutual funds have become available. Robo-advisors typically charge about 0.5%. If you go the DIY route, and invest in index funds through an online discount brokerage, you could pay less than 0.2% in MER fees depending on the ETFs you choose.
Are mer fees tax deductible? ›
Mutual fund management fees are tax deductible in non-registered accounts, but commissions or trading fees to buy stocks and other investments are not tax deductible. Note that mutual fund management fees are different from management expense ratios (MERs), which are not tax deductible.
The management fee varies but usually ranges anywhere from 0.20% to 2.00%, depending on factors such as management style and size of the investment. Investment firms that are more passive with their investments generally charge a lower fee relative to those that manage their investments more actively.
What are the three types of management fees? ›
Investment management fees are the charges associated with having someone manage your investments. The three most common fee structures are flat, asset-based, and wrap fees.
What is a good management fee on an ETF? ›
A good rule of thumb is to not invest in any fund with an expense ratio higher than 1% since many ETFs have expense ratios that are much lower. Also, ETFs tend to be passively managed, which keeps the management fee low.
What is the average Mer? ›
The total percentage of the MER may depend on factors such as the size and success of the fund. The fee typically falls somewhere between 0.5% and 2% of the invested assets. The figure is taken from the final total of each fund's assets under management (AUM).
What is an example of a management fee? ›
Example. A management fee is charged as a percentage of assets under management. Assume an investor has $100,000 to invest and an investment firm charges a management fee of 0.45% per year. Every year, the investor will have to pay $450 for management.
What is Mer profitability? ›
A high MER indicates that a marketing campaign is generating a strong return on investment (ROI) and is therefore considered to be effective. Conversely, a low MER indicates that a campaign is not generating enough revenue or profit to justify its cost, and may need to be reevaluated or adjusted.
What is a good mer for ecommerce? ›
Total revenue is just twice the amount of ad spend. (Or $2 in revenue earned for every ad dollar spent.) A good MER benchmark depends on the industry, but it is typically anything above 3.0. Meaning revenue is three times more than ad spend, or $3 in revenue earned for every ad dollar spent.
What is a good average rate of return value? ›
As a general rule of any investment, an average rate of 7% to 13% may be an excellent investment opportunity. Sometimes, a higher risk may deliver greater returns.
What is a good overall rate of return? ›
A good return on investment is generally considered to be about 7% per year, which is also the average annual return of the S&P 500, adjusting for inflation.
