The management expense ratio (MER) – also referred to simply as the expense ratio – is the fee that must be paid by shareholders of a mutual fund or exchange-traded fund (ETF). The MER goes toward the total expenses used to run such funds.
Quick recap: For reference, a good MER is usually between 2-4X, depending on the AOV and a few other factors. While there are still metrics in Facebook that we can use as information, we know that it isn't 100% correct, which makes it unreliable to optimize and scale off of.
The TER is independent of a fund's MER. It typically does not apply to fixed income transactions since commissions for fixed income funds are already embedded in the price of a bond. The TER aggregates all of the trading costs incurred by a fund over the course of a year and is expressed as a percentage of assets.
Management Expense Ratio (MER) Calculation
The MER is the percentage of the annual fees plus the annual expenses, divided by the average net assets of the fund. Typically, MERs in Canada are below 3%.
mer = Total sales revenue (over Specific time) / Total MARKETING spend (over the same period, across all channels) Here's a brief example to demonstrate the calculations. Therefore, your MER for 2022 was $3,210,000 / $658,000 = 4.75 or 475%.
How do MERs work? The MER is expressed as an annualized percentage of daily average net asset value during the period. For example if a fund's MER is 0.78%, this means the fund incurs annual costs of $78 for every $10,000 invested in a given year.
This is represented by the expense ratio formula, which is calculated by dividing total expenses by the total assets of the funds. The higher the asset base, the smaller the ratio, and vice versa, assuming total expenses stay constant.
Aim for a “good MER” of 0.25% to 0.75% by investing in ETFs and using a private investment management firm to manage your portfolio.
The management fee is a charge paid to the fund manager for their expertise in managing the investment portfolio, while the expense ratio encompasses the total annual operating costs of a fund – including the management fee. Consider working with a financial advisor when choosing investments for your portfolio.
Think of the expense ratio as the management fee paid to the fund company for the benefit of owning the fund. The expense ratio is measured as a percent of your investment in the fund. For example, a fund may charge 0.30 percent. That means you'll pay $30 per year for every $10,000 you have invested in that fund.
The MER or expense ratio represents the total cost of managing and operating a fund and is given as a percentage of the fund's total assets. It includes the management fee and a broad range of expenses.
What is marketing efficiency ratio (MER)? Marketing efficiency ratio measures the overall performance of your digital marketing efforts: Total revenue divided by total spend. Also known as marketing efficiency rating, media efficiency ratio, blended ROAS, or “ecosystem” ROAS, MER is a North Star metric.
Moreover, the MER helps investors know beforehand the net cost of putting their money into a mutual fund. Furthermore, the conversion of all operational expenses into a percentage helps investors easily compare the net cost-effectiveness of different funds.
Advisor (Management) Fees
The industry typically refers to this as an investment management fee and averages between 1-2% of assets (i.e. A $100,000 investment could cost you between $1,000 - $2,000 annually).
As an example, say your last marketing campaign generated $10,000 in revenue from a $5,000 ad spend: You divide $10k by $5k (total revenue by total ad spend) That gives you an MER of 2 (10,000/5,000 = 2) We can express this total as a ratio, meaning MER in this example is 2.0.
How to find the best ETF expense ratio. High fees can turn any investment into a poor one. A good rule of thumb is to not invest in any fund with an expense ratio higher than 1% since many ETFs have expense ratios that are much lower. Also, ETFs tend to be passively managed, which keeps the management fee low.
SPY is more expensive with a Total Expense Ratio (TER) of 0.0945%, versus 0.03% for VOO. SPY is up 28.31% year-to-date (YTD) with +$7.13B in YTD flows. VOO performs better with 28.36% YTD performance, and +$103.99B in YTD flows.
The two ways to see how closely an ETF matches the index performance are 'tracking error' and 'tracking difference'. Tracking difference addresses how closely the ETF tracks the index returns, while tracking error reflects how consistent over time the tracking quality is.
A good expense ratio, from the investor's viewpoint, is around 0.5% to 0.75% for an actively managed portfolio. An expense ratio greater than 1.5% is considered high.
Fund B has an expense ratio of 0.75%. Again, this tells us that it is likely an actively managed fund and that we pay $75 for every $10,000 we invest. While that doesn't sound like a lot, it can add up over the course of 30 years, or once you have hundreds of thousands of dollars invested.
ETFs trade throughout the day on a stock exchange, just like stocks, and their price fluctuates based on supply and demand. What this means is that with index mutual funds, your trades are priced at the end of the day based on the total value of the fund's holdings at that time.
Marketing Efficiency Ratio (MER) is calculated by taking total revenue derived from marketing, and dividing it by your total marketing spend over any given time frame.
In summary, if you're paying for an actively managed fund at a bank branch where you receive support from a financial advisor or planner, you can expect to pay an MER of 1.8% or more. If you open a brokerage account and invest directly in a passively managed ETF, you can expect to pay an MER of roughly 0.25%.
Management expense ratio (MER)
Expressed as a percentage of assets under management (AUM), it captures the management fee, operating expenses and taxes incurred by a fund on an annual basis.