Sunday, April 19, 2009

What is an MER?

This is a Sunday feature looking back at selected articles from the early days of this blog before readership had ramped up. Enjoy.

The people who run mutual funds have to eat. They also have to pay commissions to the people who sell units in mutual funds to the public. Other expenses include the cost of buying and selling stocks and paying for those slick commercials on TV scaring you into believing that you can’t do this investing stuff alone.

Where does the money to pay for all this stuff come from? Well, mutual fund managers could look for nickels on the sidewalk, but it’s easier to take some of the giant pot of investor money invested in the mutual fund. The percentage of investor money taken for these expenses each year is called the Management Expense Ratio, or MER for short.

A quick look through mutual funds with the Yahoo fund screener shows that for US funds holding at least $100M of investors’ money, the MERs tend to be around 1%. There is some variability, though. For example, the Vanguard 500 Index only charges an MER of 0.16% per year, while the Janus Adviser Long/Short Fund charges 3.47% per year.

In Canada, MERs tend to be much higher. According to the globefund.com data, Canadian equity funds holding at least $100M of investors’ money tend to charge an MER of about 2%. Canadians pay a lot more than Americans.

As in the US, the MERs charged by Canadian funds tend to vary from fund to fund: for example, the iShares CDN LargeCap 60 Index Fund charges 0.17% per year, and the Trans GS Canadian Equity Fund charges 4.21% per year.

When mutual funds report their investment returns, the MER is subtracted first. This is good in one way because the reported returns are what the investor actually receives. On the other hand, this tends to hide the MER from the investor’s view.

3 comments:

  1. I like the idea of the TD e-series funds which offer a reduced MER for accepting a more efficient delivery system for sales and information.

    I prefer purchasing individual stocks which offer an even lower transaction expense.

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  2. Gene: Lower MERs are definitely better. For those with a large enough protfolio, buying a suite of stocks that form their own index (of sorts) is cheaper than any fund.

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  3. It's true that one can construct their own index by using individual stock purchases, especially if they are willing to get an approximate match. Perhaps as few as 20 stocks would give high correlation to a broad-based index, though I can't site research to confirm this at the moment.

    Index funds do, however offer great value. The MERs are very reasonable. The hassle of trying to index by oneself might not be worth it.

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