Canadian exchange-traded funds and mutual fund investors pay a built-in fee, known as the management expense ratio. It represents the total cost of managing and operating a fund, and is expressed as a percentage of the fund’s total assets. Since it’s collected at the fund level, the MER is deducted from the fund’s assets before performance returns are reported.
The MER is calculated as an annualized percentage of the fund’s average daily net asset value over a specific period. For example, a fund with a 0.25% MER would cost $25 annually for every $10,000 invested.
What Costs Are and Aren’t Covered By MERs
For funds that include embedded advice, the MER encompasses a wide range of expenses, some of which include portfolio management, administrative costs, regulatory fees, financial planning advice, statements, and taxes.
However, for fee-based funds, the MER only includes investment management fees, operating expenses, and taxes. There are no trailing commissions for these funds. It’s also important to note that the MER for fee-based funds does not include advisory fees, trading costs, sales charges, redemption fees, and currency conversion, all of which are charged separately by the financial services firm.
How Does the MER Affect Your Return?
Like any fee, the MER reduces investor returns. Since it’s automatically deducted, the mutual fund performance shown on your account statement is already net of MER. In other words, if a fund posts a 7.0% annual return but charges a 1.5% MER, the net return to the investor would be 5.5%.
The lower the MER, the more of the fund’s growth the investor keeps. Conversely, a higher MER means a greater portion of your investment goes toward covering fund costs, reducing your overall returns.
Where Can You Find a Fund’s MER?
Fund companies are generally transparent about MERs. You can find them on the fund provider’s website and in the latest Management Report of Fund Performance, a publicly available document, and on the Morningstar Canada website. MERs are also disclosed in the Fund Facts document and the simplified prospectus.
