Expense Ratio

Reviewing the fee table of the Wexbury Balanced Fund with a customer, a representative points to the 0.94% total annual fund operating expense figure. That percentage includes the management fee, the 12b-1 fee and other operating expenses, but it does NOT include:

1. A.custody and transfer agency costs, which the adviser always absorbs.Those are ordinary fund operating expenses and are included.
2. B.the 12b-1 fee, which is charged against distributions rather than against assets.The 12b-1 fee is an annual asset-based charge and is included in the ratio.
3. C.the fund investment advisory fee, which is disclosed only in the statement of additional information.The advisory fee is the largest component of the expense ratio and appears in the fee table.
4. D.front-end sales loads and contingent deferred sales charges, which appear separately as shareholder fees.Correct. Sales charges are shareholder fees, not annual operating expenses.

Why: The expense ratio measures the recurring costs deducted from fund assets each year: the advisory fee, any 12b-1 distribution and service fee, and administrative costs such as custody, transfer agency, audit and legal. It excludes one-time transaction charges paid by the shareholder, namely front-end sales loads and contingent deferred sales charges, which appear in the separate shareholder fees section of the table. It also excludes the brokerage commissions the fund pays to trade its portfolio, which are absorbed into the cost of the securities.

A mutual fund's expense ratio represents:

1. A.The fund's total returnReturn is what the fund earned; the expense ratio is what it cost to run. The two are related only in that expenses are deducted before the reported return, so a high ratio quietly reduces performance rather than describing it.
2. B.The front-end sales loadBoth are costs, which is what makes the confusion easy, but they are charged in different places and at different times. A load is a one-time charge paid by the buyer to the distributor; the expense ratio is an ongoing charge levied against fund assets every year, including in a fund with no load at all.
3. C.Portfolio turnoverTurnover measures trading activity, not cost, and the two are reported as separate figures. Heavy trading does generate brokerage commissions, but those transaction costs are not part of the expense ratio, which is why a high-turnover fund can look inexpensive by that measure alone.
4. D.Annual operating expenses as a percent of average net assetsCorrect - operating cost divided by assets.

Why: The expense ratio is annual operating expenses as a percentage of average net assets.

The Vermeer Balanced Fund reports a 0.62% annual expense ratio in its prospectus. The fund also charges a 3.5% front-end sales load and paid brokerage commissions on portfolio trades during the year. The expense ratio reflects:

1. A.Operating costs and portfolio brokerage commissions, but not the sales loadThis gets the load right and the commissions wrong. Brokerage costs are reflected in the fund's returns, not in the ratio.
2. B.Only the management fee paid to the adviser, since other expenses are borne by the fund sponsorThe ratio is broader than the management fee, and the fund, not the sponsor, bears administrative and distribution expenses.
3. C.All costs an investor bears, including the front-end load spread over the expected holding periodLoads are never amortized into the expense ratio. They are disclosed separately in the fee table.
4. D.Ongoing operating costs such as management, administration, and 12b-1 fees, but not the sales load or portfolio brokerage commissionsCorrect. The ratio measures recurring operating costs only, leaving out both the load and the fund's own trading costs.

Why: The expense ratio captures the fund's recurring annual operating costs, which include the management fee, administrative expenses, and any 12b-1 distribution fee. It does not include the sales load an investor pays when buying shares, and it does not include the brokerage commissions the fund pays when it trades its portfolio; those transaction costs reduce returns but sit outside the reported ratio. The clue is the distinction between ongoing operating costs and one-time or transactional costs. Review mutual fund fees and expenses.

A mutual fund's expense ratio:

1. A.Is a one-time purchase feeA one-time charge at purchase is the sales load. The expense ratio is recurring: it is deducted from fund assets throughout the year and every year the shares are held, which is why a small difference in the ratio compounds into a large difference over a long holding period.
2. B.Has no effect on returnsBecause the expenses are taken out before the fund reports its results, the investor never sees a separate deduction, which is what makes them feel painless. The charge is nonetheless real: the published return is already net of it, so a higher ratio has quietly lowered the number the shareholder is reading.
3. C.Directly reduces investors' net returnsCorrect - higher expenses lower net return.
4. D.Increases investors' returnsHigher fees cannot help the shareholder. Paying more for management may buy skill that outperforms, but the expense itself is a subtraction from whatever the portfolio earns, so it always works against the net result.

Why: The expense ratio is deducted from fund assets and directly reduces the net return investors earn.