What Is the Gross Expense Ratio (GER)?
Key takeaways
– The gross expense ratio (GER) is the total percentage of a fund’s assets used to pay the fund’s operating costs (management fees, administrative expenses, 12b‑1 fees, etc.).
– GER is typically reported in two ways: the audited annual-report GER (actual fees charged in a fiscal year) and the prospectus GER (current fee schedule, may reflect anticipated changes).
– GER differs from the net expense ratio: the net ratio reflects fee waivers, reimbursements, or temporary reductions that lower fees charged to investors.
– High expense ratios reduce investors’ net returns; always compare GER and net expense ratio, and check whether fee waivers are temporary.
– Passive/index funds generally have lower GERs than actively managed funds; GERs commonly range from near 0% up to around 3%.
How the gross expense ratio (GER) works
– What GER includes: GER captures operating costs that the fund directly bears, such as portfolio management fees, administrative and legal costs, accounting, custodian fees, and any 12b‑1 marketing/service fees.
– What GER excludes: It generally does not include sales loads paid by investors or brokerage trading commissions that are paid externally and not charged to the fund’s operating account.
– Audited vs. prospectus GER: Data providers often pull GER from a fund’s audited annual report (actual fees for the past fiscal year). The prospectus ratio shows the fee schedule for the current period and may include contractual changes that haven’t yet appeared in the audited results. Both figures are useful: audited ratios show historical costs; prospectus ratios show current/expected fee structure.
– Fee waivers and reimbursements: A fund company can waive or reimburse fees to lower the amount charged to shareholders. Those waivers reduce the net expense ratio but do not change the gross expense ratio unless the waiver is permanent and reflected in filings. Waivers may be temporary and subject to recoupment.
Why GER matters to investors
– Fees reduce returns dollar-for-dollar. A higher GER means a larger chunk of gross returns is consumed by expenses, lowering the money that compounds for investors.
– Comparing GER across similar funds (e.g., actively managed large‑cap growth funds vs. passive large‑cap index funds) helps identify cost-efficient options.
– Checking both gross and net ratios reveals whether current low costs are the result of temporary waivers.
Practical example: how expenses affect returns
– Simple impact example: If a fund delivers a gross return of 7.0% in a year and has an expense ratio of 1.2%, a rough net return to investors would be about 5.8% (7.0% − 1.2%).
– Compounding example: $10,000 invested for 10 years at 7.0% annual return before fees grows to about $19,672. With a 1.2% expense ratio (net return ≈ 5.8%), the investment grows to about $17,623. The difference is roughly $2,049 over 10 years—lost to higher fees. (These are simplified calculations that do not account for taxes, loads, or bid/ask impacts.)
Examples of gross expense ratios
– Actively managed fund example: AB Large Cap Growth Fund (Class A, as of Sept. 2020) reported a gross expense ratio around 0.65% with a small fee waiver of 0.01% that produced a net expense ratio near 0.64%. Management fees were about 0.51% (see fund summary prospectus). Actively managed funds typically carry higher GERs than passive funds because of research and active portfolio management costs.
– Index/passive fund example: T. Rowe Price Equity Index 500 Fund (seeking to track the S&P 500) reported a gross expense ratio near 0.19% as of Sept. 2020; contractual fee waivers in place meant the net ratio was effectively the same. Index funds and ETFs tend to have lower GERs due to passive management and economies of scale.
How to find and interpret a fund’s GER — Practical steps
1. Locate the numbers
– Check the fund prospectus (the “expense ratio” section) for the prospectus GER and any stated fee waivers.
– Download the fund’s annual report (audited) to see the annual-report (audited) or “audited gross expense ratio,” which shows actual fees charged during the fiscal year.
– Use third-party data platforms (Morningstar, Lipper, fund screener tools) for quick comparisons; those often show both audited and prospectus expense ratios.
2. Compare gross and net expense ratios
– If the net expense ratio is materially lower than the gross ratio, find details about the waiver (amount, expiration date, whether recoupment is permitted). Temporary waivers may end, and fees could rise.
3. Compare to peers and benchmarks
– Compare the GER to similar funds (same asset class, strategy, share class). For index strategies, compare to ETFs or other index funds tracking the same benchmark.
4. Calculate dollar impact
– Multiply your investment by the expense ratio to get an annual fee estimate (Investment × GER = annual fees approximate). For multi-year planning, use the net expense ratio for expected fees unless waivers are permanent.
5. Consider total costs, not only GER
– Include trading costs, tax inefficiency (capital gains distributions), and any sales loads/commissions. For funds with high portfolio turnover, implicit trading costs can materially raise total investor costs.
6. Read the fine print on waivers/recoupments
– If waivers are time‑limited or subject to recoupment, build a plan for the possibility that fees will increase when waivers end.
7. Check performance after fees
– Use after‑fee returns (i.e., total return reported by the fund, which already nets out operating expenses) to compare actual investor experience versus gross benchmark returns.
A practical checklist before investing
– Did you check both the prospectus and the latest annual report for GER?
– What is the net expense ratio and are waivers temporary? When do waivers expire?
– How does the GER compare to similar funds and to low‑cost ETFs or index funds?
– What is the fund’s turnover and likely trading cost impact?
– Are there sales loads, sub‑account fees, or platform charges that add to expenses?
– What has been the fund’s after‑fee historical performance versus peers and benchmark?
– Can you find third‑party ratings (Morningstar) and read manager commentary about costs and strategy?
Quick formulae and examples
– Approximate annual fees in dollars = Investment amount × Net expense ratio (use net if waivers apply)
– Approximate net return = Gross return (before fees) − Expense ratio (this is a simplification; actual fund returns already account for fees)
– Compound example: Future value with net return r over n years = Principal × (1 + r)^n
Where to get authoritative information
– Fund prospectus and statement of additional information (SAI) — these are required by the SEC and available on the fund company’s website.
– Annual report (audited) for the audited gross expense ratio.
– SEC EDGAR filings for up‑to‑date legal documents and fee disclosures.
– Reputable data providers (Morningstar, Lipper, Bloomberg) for comparisons and historical expense reporting.
Frequently asked questions
– Q: Is a lower GER always better?
A: Generally, lower ongoing operating costs are better, but also consider strategy, tracking error (for index funds), tax efficiency, and net performance relative to after‑fee results. A slightly higher GER on a fund that consistently outperforms net of fees may still be a better choice than a cheaper fund with poor after‑fee results.
– Q: Should I trust the net expense ratio if it is much lower than the gross one?
A: Investigate the waiver terms. If the reduction is temporary, plan for the possibility of higher fees in the future. Use the net ratio for short‑term fee expectations and the gross ratio (or prospective post‑waiver ratio) for longer‑term planning.
– Q: Do ETFs have GERs?
A: Yes. ETFs report expense ratios that function like mutual fund GERs for operating costs. ETFs often have lower expense ratios than actively managed mutual funds, but check bid/ask spreads and trading commissions which can add cost.
Sources and further reading
– Investopedia — “Gross Expense Ratio (GER)” (summary and definitions): https://www.investopedia.com/terms/g/gross-expense-ratio.asp
– AB Large Cap Growth Fund — Summary Prospectus (Class A), page references for expense data (accessed Sept. 2020).
– T. Rowe Price Equity Index 500 Fund — fund documents for expense information (accessed Sept. 2020).
– Fund prospectuses and audited annual reports (available on fund company websites and the SEC EDGAR database).
Editor’s note: The following topics are reserved for upcoming updates and will be expanded with detailed examples and datasets.