The Management Expense Ratio (MER) is the cumulative sum of fees associated with fund management, operating costs and taxes charged as a percentage of the fund’s net assets.
Mutual funds are great investment vehicles that provide investors with professionally managed solutions across various themes and asset classes based on their risk appetite and investment objectives.
The costs of managing individual portfolios, along with the necessary due diligence in security selection can often be expensive and rather time-consuming.
These costs are factored into expense ratios charged by asset managers to investors and can vary quite a bit.
For example, iShares Core S&P 500 Index ETF is an index fund that replicates the returns of the S&P index passively and charges less than 10 basis points in fees while Ninepoint Energy Fund ETF is an actively managed fund that charges more than 2.50% in fees, but has significantly outperformed the benchmark index.
What is Included in a Management Expense Ratio?
Asset managers are responsible for running operations and managing investor capital.
As a result, these institutions have a range of expenses pertaining to compliance, investor relations and other administration related costs.
The Management Expense Ratio (MER) is the cumulative sum of fees associated with fund management, operating costs and taxes charged as a percentage of the fund’s net assets.
Such costs can be classified into three broad categories:
1. Management Fee
Management fee costs include costs of investment management, as well as the sales commissions paid to the financial advisor.
2. Operating Expenses
Operating expenses are earmarked charges incurred for administrative salaries and expenses, record-keeping, trading expenses and custody fees.
3. Taxes
Taxes are charged on the management fees and other charges levied during the course of the year.
Usually, the amount of tax, like HST, depends on the unit holder’s province and can vary.
Is Anything Not Included in MER?
The MER is a representative percentage cost of staying invested in the fund and the costs associated with being in the investment.
However, upon liquidation or portfolio rebalancing, there are always additional costs that are not included in the MER as they arise due to the investor’s actions and discretion such as brokerage charges, redemption costs, switch fees and other trading related expenses.
What’s a Good MER?
Investment selection is a building block to achieving an investor’s goals and objectives.
There are several paths to reach a target destination, but each path involves making choices based on risk appetite, levels of uncertainty, and time horizon.
This directly impacts the portfolio construction process wherein investors can opt for vanilla index ETFs that have very low MERs or opt for more actively managed products that come with the possibility of significantly outperforming the stock market.
MERs can range from a few basis points in fees to more than 3% depending on the fund.
A good MER doesn’t exist in isolation and is a factor of the investment type along with the performance characteristics of the financial asset.
Usually, passive vehicles should have MERs of less than 25 basis points and active products should have fees of less than 1.50% to be considered to have good MERs.
Did You Know?
MERs are paid out of the fund and are adjusted in the reported returns, thereby enabling an easy apples-to-apples comparison amongst different fund offerings.
How Does the MER Affect Investment Returns?
The rationale of investing passively for the long term rather than speculating on short term price swings is based on the fact that you realize the benefits of long-term compounding and allow your capital to work for you with the passage of time.
However, it is important to consider the drag on potential appreciation as fees chip away at returns over the course of time.
Studies have always highlighted how high MERs impact long-term growth while index funds with lower cost structures enable better wealth creation prospects for investors.
For example, $100,000 invested growing at 6% compounded for 25 years would produce a total of $430,000.
But say you pay a mere 2% in fees over that duration, and it will only result in $267,000 at the end of 25 years.
By playing defense and reducing the impact of higher fees, investors can focus on growing capital.
| Time/Returns | 6% Benchmark | 4% Return after MER of 2% |
5.75% Return after MER of 0.25% |
|---|---|---|---|
| Year 0 | $100,000 | $100,000 | $100,000 |
| Year 25 | $430,000 | $267,000 | $405,000 |
Frequently Asked Questions
- What is the average MER in Canada?
- How can I minimize investment fees?
