Gross Expense Ratio vs. Net Expense Ratio

There are two key metrics when considering the costs associated with mutual funds and exchange-traded funds (ETFs): the gross expense ratio and the net expense ratio. The gross expense ratio includes all fees and expenses incurred by the fund, such as management fees, administrative costs and operational expenses. While the net expense ratio reflects the actual cost to investors after accounting for any temporary fee reductions or reimbursements by the fund’s management.

For specifics about your portfolio, a financial advisor can help you determine whether you’re paying more than you should for your investments.

What Is a Gross Expense Ratio?

A gross expense ratio represents the total annual cost of operating a mutual fund or exchange-traded fund (ETF) before any fee waivers or reimbursements are applied. Expressed as a percentage of a fund’s average assets under management, it includes management fees, administrative costs, marketing expenses (known as 12b-1 fees) and other operating costs. Essentially, the gross expense ratio shows what investors would pay if the fund’s sponsor did not absorb any costs to make the fund more competitive.

Understanding the gross expense ratio is important because it reflects the true cost of running the fund. Even though many fund companies temporarily waive or reimburse certain expenses to attract investors, those waivers can expire, meaning costs could rise in the future. The gross figure helps investors gauge the fund’s long-term efficiency and compare it to similar options without being misled by short-term discounts.

While investors typically pay the net expense ratio, which accounts for those temporary reductions, the gross ratio provides valuable transparency. It highlights how efficiently a fund operates on its own and can help you identify whether lower advertised costs are sustainable or simply promotional. When evaluating funds, reviewing both the gross and net expense ratios offers a clearer picture of what you might pay over time and how much of your investment returns could be eroded by fees.

What Is a Net Expense Ratio?

The net expense ratio reflects the actual annual cost of managing and operating a mutual fund or ETF after accounting for any fee waivers, reimbursements or temporary reductions offered by the fund’s management.

This ratio is expressed as a percentage of the fund’s average net assets and is designed to provide investors with a more accurate picture of the costs they will incur by holding the fund. Unlike the gross expense ratio, which includes all potential expenses, the net expense ratio considers the financial relief provided by the fund manager to make the fund more competitive and attractive to investors.

Fund managers may offer fee waivers or reimbursements for various reasons, such as attracting more investors or maintaining a competitive edge in the market. These cost-saving measures can significantly reduce the overall expense ratio, making it a key factor for investors when comparing similar funds.

Key Differences: Gross Expense Ratio vs. Net Expense Ratio

A financial advisor applying gross and net expense ratios to a broader investment strategy for clients.

Here’s a breakdown of five key differences between both metrics that you should consider as an investor:

Costs: The gross expense ratio includes all operating expenses of a mutual fund or ETF, such as management fees, administrative costs and marketing fees, giving a complete view of the fund’s expenses. In contrast, the net expense ratio represents the actual costs to investors after accounting for any fee waivers or reimbursements offered by the fund’s management, providing a more accurate picture of what investors will pay.
Temporary reductions: Gross expense ratios do not account for any temporary fee reductions or reimbursements, instead reflecting the fund’s total potential costs under normal conditions. Net expense ratios, on the other hand, include these temporary measures, showing the reduced costs that investors benefit from.
Impact on returns: Higher gross expense ratios can significantly impact the overall returns of a fund by reducing the amount of profit passed on to investors. Conversely, the net expense ratio, being lower due to fee reductions, means a smaller portion of returns is consumed by fees, potentially leading to higher net returns for investors.
Investor decision-making: Gross expense ratios provide a broader understanding of a fund’s total expenses without any adjustments, which is useful for evaluating the fund’s expense structure in its entirety. Net expense ratios, however, offer a realistic view of what investors will actually pay, making them a critical factor in comparing the true cost-efficiency of different funds.
Competitive edge: Fund managers might use fee waivers to lower the net expense ratio temporarily, enhancing the fund’s appeal and competitiveness. The gross expense ratio, unaffected by these temporary measures, remains stable, reflecting the fund’s standard cost structure without adjustments.

What’s a Good Expense Ratio?

A good expense ratio depends on the type of investment fund you’re evaluating, but generally, lower is better. The expense ratio represents the percentage of a fund’s assets used to cover operating costs, such as management fees, administrative expenses and marketing, and it directly reduces your returns over time. Even small differences in expense ratios can have a significant impact on long-term performance, especially for investors in index or retirement funds where compounding plays a major role.

For index funds and ETFs, a good expense ratio typically falls below 0.20%, with some of the largest funds charging as little as 0.03%. These funds are passively managed, so costs are lower because they simply track a benchmark index rather than rely on active investment decisions.

In contrast, actively managed mutual funds often charge between 0.50% and 1.00%, reflecting the higher costs of research, trading and management oversight. While higher fees can be justified if the fund consistently outperforms its benchmark, most investors find it difficult for active managers to deliver returns that offset the extra cost.

Ultimately, a good expense ratio is one that aligns with your investment strategy and goals. If you’re focused on long-term, steady growth, low-cost index funds may offer the best value. However, if you’re pursuing a specialized strategy, such as emerging markets or sector investing, slightly higher fees might be acceptable.

Bottom Line

An investor reviewing her portfolio with an advisor.

The gross expense ratio can offer you a comprehensive view of all the potential costs that a fund may incur, while the net expense ratio reflects the actual costs investors will pay after any fee waivers or reimbursements. By considering both ratios, investors can better assess the true cost-efficiency of their investment options.

Investment Planning Tips

A financial advisor can help you interpret an investment’s gross and net expense ratios, and apply them to a broader investment strategy for your portfolio. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
If you are considering an investment, SmartAsset’s free online investment calculator could help you estimate how it will grow over time.