Operating expenses (Opex) are annual asset-based expenses paid out of fund assets by an investment fund as a percentage of the fund’s value, such as the investment advisory fee and marketing and distribution expenses as well as the custodial fee, transfer agency fee, legal fees and accountant’s fees.  The annual fund operating expenses paid by an investment fund as a percentage of the value of the fund comprise:

  • Management fee – An asset-based fee paid out of an investment fund to the fund’s investment adviser for portfolio management, including any other fees payable to the fund’s investment adviser or its affiliates not included in the other expenses category;
  • Distribution fee – An annual asset-based fee paid out of the assets of an investment fund to compensate brokers and others for marketing and selling fund shares and often also to cover the costs of providing related services (it referring to the SEC 12b-1 fee charged by US funds, capped by the SEC at 1% of fund assets);
  • Shareholder service fee – An asset-based fee that, if not included in distribution fees, is paid to those who respond to investor inquiries and provide investors with information about the fund; and
  • Other expenses – Expenses paid out of investment fund assets that are not already included in any another asset-based fee, including custodial fees, transfer agency fees, legal fees, accountant fees and other administrative expenses.

Total annual fund operating expenses is the total of a fund’s annual operating expenses expressed as a percentage of the fund’s average net assets.

Fund Expenses (Example)
Expense Ratio (Gross) 5/1/2017 0.98%
Expense Ratio (Net) 5/1/2017 0.98%
Distribution and/or service fee (12b-1) Fees 0.25%

The additional fees and costs that can be incurred when purchasing exchange-traded funds (ETFs) and closed-end funds include:

  • Brokerage commission – A fee investors pay brokers with each purchase or sale of EFT shares, often structured as a flat fee charged every time the investor trades;
  • Bid-ask spread – The difference between the highest price a broker or dealer is prepared to pay for the purchase of a specified number of shares at any given time (bid) and the lowest price at which a broker or dealer will sell the shares (ask); and
  • Premium (discount) to net asset value – When the shares of an ETF or closed-end fund are trading at a price higher (lower) than their net asset value (NAV) per share in reaction to the market supply and demand.

The fees and expenses of investment funds are disclosed in the fee table of a mutual fund prospectus or ETF summary prospectus.

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