What Is the Gross Expense Ratio (GER)?
Let me explain the gross expense ratio, or GER, directly to you—it's the total percentage of a mutual fund's assets that go toward running the fund. This includes any fee waiver or expense reimbursement agreements in place, but it doesn't cover sales or brokerage commissions that aren't charged directly to the fund; those would show up in the net expense ratio instead.
You might hear it called the audited gross expense ratio, and data providers like Morningstar get this figure from the fund’s audited annual report. These annual-report ratios show the actual fees charged in a specific fiscal year, while prospectus ratios account for any material changes to the expense structure in the current period.
Key Takeaways
Here's what you need to grasp: the gross expense ratio is the annual cost of investing in a mutual fund or ETF, essentially the slice of assets set aside for operating the fund. It factors in fee waivers or expense reimbursements, but skips sales or brokerage commissions not directly billed to the fund. This sets it apart from the net expense ratio, which covers management fees, administrative costs, and other expenses without including those waivers or reimbursements.
How the Gross Expense Ratio (GER) Works
You should understand why the gross expense ratio matters— it tells you the full fees for managing the fund, and those fees directly impact the net return you get as an investor. High fees can seriously drag down the fund's performance after everything is accounted for.
With the growth of exchange-traded funds (ETFs), which often compete on lower costs, discussions about mutual funds' GER have intensified. The GER covers all fees the fund incurs, like management fees, 12B-1 fees, administrative costs, and operating expenses. I recommend you compare it to the fund’s net expense ratio and get clear on the differences.
Sometimes funds have agreements to waive, reimburse, or recoup fees, especially for new ones. An investment company and its managers might waive fees after launch to keep the ratio low for you as an investor. The net expense ratio shows the fees after these adjustments, and these reductions are usually temporary, after which full costs kick in.
For instance, if a fund shows a net expense ratio of 2% and a gross of 3%, that means 1% of assets went to waivers, reimbursements, or rebates not in the net figure. Remember, these might not last, so as a prudent investor, examine both ratios and stack them against similar funds before committing.
Examples of Gross Expense Ratios
In practice, passively managed funds like index funds usually have lower expense ratios than actively managed ones. Gross ratios typically fall between 0% and 3%. Let me give you two examples to illustrate.
The AB Large Cap Growth Fund
Take the AB Large Cap Growth Fund, an actively managed option with a gross expense ratio of 0.65% and a net of 0.64% for Class A shares as of September 2020. It has a small fee waiver and reimbursement of 0.01%, with management fees at 0.51%. This fund focuses on large-cap U.S. stocks with high growth potential, holding about 50 to 70 stocks.
The T. Rowe Price Equity Index 500 Fund
On the passive side, the T. Rowe Price Equity Index 500 Fund aims to mirror the S&P 500 Index. As of September 2020, it has contractual fee waivers, resulting in both a gross and net expense ratio of 0.19%.
