Net vs. Gross Expense Ratio of Mutual Funds

[inquisitive]

I have a selection of Fidelity mutual funds to choose from and noticed differences between the net and the gross expense ratios, which are sometimes substantial. Eg, this one has an 8% difference:

https://fundresearch.fidelity.com/mu...ices/62827M607

I did some web searches and have not found an explanation that makes sense. Apparently the gross expense ratio refers to all the fees deducted from the assets of the fund (which can exclude 12b and other fees). However, sometimes there are fee waivers which makes it less costly and the net expense ratio reflects this. So the question is, for me in a tax-advantaged retirement account, do I receive these fee waivers and should I just be looking at the net expense ratio?

Thanks!

[haha]

I am not an expert in this, but I believe that the difference is what you say, fee waivers. Most commonly it is a fund that has not yet achieved its design size, so the expenses are piled on a relatively small number of shares. The waiver (by the management company)attempts to make this more palatable until the fund can attract a larger asset base. It is done at the level of the fund, not on individual holders, so it should not matter what sort of account you hold the shares in. Another motivation for waivers is financial repression- again, if the fund manager does not cut his fees there might be so little income in many shorter term income funds that they might not attract assets.

Ha

[MichaelB]

The fund annual report must include a statement of operations where they detail all the fund expenses before any waiver. For this fund it is here http://eventidefunds.com/wp-content/...port-FINAL.pdf and the expense breakdown is on page 15.

HaHa is correct, the waiver is at the macro fund level and applies to all outstanding shares.

The fund prospectus and annual report should include an entry that states when the waiver expires.

[scrabbler1]

Having been in a Fidelity mutual fund when its asset base was pretty small in its early years, I have seen Fidelity reduce the expense ratio a little bit until the fund grew over time and its ER decreased to the reduced level on its own.

I can't say I have ever seen in an annual or semi-annual report a target date for when the ER reduction would expire, though. Then again, I can't say I looked very hard for one.

[MRG]

Quote:

Originally Posted by inquisitive I have a selection of Fidelity mutual funds to choose from and noticed differences between the net and the gross expense ratios, which are sometimes substantial. Eg, this one has an 8% difference: https://fundresearch.fidelity.com/mu...ices/62827M607

Minor point, but for accuracy sake, this is not a Fidelity fund. It's available through Fidelity's NTF network. Not sure who would gets the .20% 12b1 fee.
MRG

[inquisitive]

Quote:

Originally Posted by haha I am not an expert in this, but I believe that the difference is what you say, fee waivers. Most commonly it is a fund that has not yet achieved its design size, so the expenses are piled on a relatively small number of shares. The waiver (by the management company)attempts to make this more palatable until the fund can attract a larger asset base. It is done at the level of the fund, not on individual holders, so it should not matter what sort of account you hold the shares in. Another motivation for waivers is financial repression- again, if the fund manager does not cut his fees there might be so little income in many shorter term income funds that they might not attract assets. Ha

So then I should basically just look at the net expense ratios and ignore the gross ratios?

[Animorph]

Per the summary prospectus the fee wavier agreement ends in October 2014, so that might bear some watching. Most of the fees were "Other", so not much to go on there. The full prospectus doesn't have the big "Other" fees, so that's confusing too. I wouldn't touch it with a 10 foot pole.

[scrabbler1]

Quote:

Originally Posted by inquisitive So then I should basically just look at the net expense ratios and ignore the gross ratios?

That's what I do.

[bamsphd]

Quote:

Originally Posted by inquisitive So then I should basically just look at the net expense ratios and ignore the gross ratios?

Fee waivers are a marketing device.

If you are the type who regularly monitors your expense ratios, and your account allows you to easily change investments with no tax impacts, transaction fees, or bid/ask spread costs then you can take advantage of funds with fee waivers.

If you might not quickly notice when the fee waiver expires, or you might incur costs moving your money, then invest based on the gross ratios.

[jazz4cash]

Quote:

Originally Posted by inquisitive So then I should basically just look at the net expense ratios and ignore the gross ratios?

With the info provided that the fee waivers expire in 6 months, why would you ignore the gross ratio? The er on this particular fund is HUGE.